Solution Manual For Financial Statement Analysis,
5 5 5 5 5
13th Edition
5
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
5 5 5 5 5 5 5 5 5 5 5
, Chapter515 Introductio
n5to5Financial5Reporting
QUESTIONS
1- 1. a.
The5AICPA5is5an5organization5of5CPAs5that5prior5to519735accepted5the5pr
imary5responsibility5for5the5development5of5generally5accepted5accounting
5principles.5Their5role5was5substantially5reduced5in519735when5the5Financi
al5Accounting5Standards5Board5was5established.5 Their5role5was5further5re
duced5with5the5establishment5of5the5Public5Company5Accounting5Oversig
ht5Board5was5established5in52002.
b. The5Financial5Accounting5Standards5Board5replaced5the5Accounting5
Principles5Board5as5the5primary5rule-
making5body5for5accounting5standards.5It5is5an5independent5organiza
tion5and5includes5members5other5than5public5accountants.
c. The5SEC5has5the5authority5to5determine5generally5accepted5accounting5
principles5and5to5regulate5the5accounting5profession.5The5SEC5has5elect
ed5to5leave5much5of5the5determination5of5generally5accepted5accounting5
principles5to5the5private5sector.5 The5Financial5Accounting5Standards5Bo
ard5has5played5the5major5role5in5establishing5accounting5standards5sinc
e51973.5 Regulation5of5the5accounting5profession5was5substantially5turne
d5over5to5the5Public5Company5Accounting5Oversight5Board5in52002.
1-52.
Consistency5is5obtained5through5the5application5of5the5same5accounting5
principle5from5period5to5period.5 A5change5in5principle5requires5statement5
disclosure.
1-53.
The5concept5of5historical5cost5determines5the5balance5sheet5valuation5of5land.5T
he5realization5concept5requires5that5a5transaction5needs5to5occur5for5the5profit5to5
be5recognized.
1-54. a.5 Entity e.5 Historical5cost
b. Realization f.5 Historical5cost
c. Materiality g.5 Disclosure
d. Conservatism
1-55. Entity5concept
,1-56.
Generally5accepted5accounting5principles5do5not5apply5when5a5firm5does5not5
appear5to5be5a5going5concern.5 If5the5decision5is5made5that5this5is5not5a5going5c
oncern,5then5the5use5of5GAAP5would5not5be5appropriate.
1-57.
With5the5time5period5assumption,5inaccuracies5of5accounting5for5the5entity,5shor
t5of5its5complete5life5span,5are5accepted.5The5assumption5is5made5that5the5entity
5can5be5accounted5for5reasonably5accurately5for5a5particular5period5of5time.5 In5
other5words,5the5decision5is5made5to5accept5some5inaccuracy5because5of5inco
mplete5information5about5the5future5in5exchange5for5more5timely5reporting.5 The5
statements5are5considered5to5be5meaningful5because5material5inaccuracies5are
5not5acceptable.
1- 8.5 5 It5is5true5that5the5only5accurate5way5to5account5for5the5success5or5failure5of5an5ent
ity5is5to5accumulate5all5transactions5from5the5opening5of5business5until5the5busi
ness5eventually5liquidates.5 But5it5is5not5necessary5that5the5statements5be5com
pletely5accurate5in5order5for5them5to5be5meaningful.
1- 9. a. A5year5that5ends5when5operations5are5at5a5low5ebb5for5the5year.
b. The5accounting5time5period5is5ended5on5December531.
c. A5twelve-
month5accounting5period5that5ends5at5the5end5of5a5month5other5than5Dece
mber531.
1-10. Money.
1-
11.5 5 When5money5does5not5hold5a5stable5value,5the5financial5statements5can5
lose5much5of5their5significance.5 To5the5extent5that5money5does5not5remain5sta
ble,5it5loses5usefulness5as5the5standard5for5measuring5financial5transactions.
1-12.
No.5 There5is5a5problem5with5determining5the5index5in5order5to5adjust5the5state
ments.5 The5items5that5are5included5in5the5index5must5be5representative.5In5add
ition,5the5prices5of5items5change5because5of5various5factors,5such5as5quality,5te
chnology,5and5inflation.
Yes.5A5reasonable5adjustment5to5the5statements5can5be5made5for5inflation.
1-13. False.5 An5arbitrary5write-
off5of5inventory5cannot5be5justified5under5the5conservatism5concept.5 The5cons
ervatism5concept5can5only5be5applied5where5there5are5alternative5measureme
nts5and5each5of5these5alternative5measurements5has5reasonable5support.
, 1-14.
Yes,5inventory5that5has5a5market5value5below5the5historical5cost5should5be5wri
tten5down5in5order5to5recognize5a5loss.5 This5is5done5based5upon5the5concept5
of5conservatism.5 Losses5that5can5be5reasonably5anticipated5should5be5taken5
in5order5to5reflect5the5least5favorable5effect5on5net5income5of5the5current5perio
d.
5 5 5 5 5
13th Edition
5
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
5 5 5 5 5 5 5 5 5 5 5
, Chapter515 Introductio
n5to5Financial5Reporting
QUESTIONS
1- 1. a.
The5AICPA5is5an5organization5of5CPAs5that5prior5to519735accepted5the5pr
imary5responsibility5for5the5development5of5generally5accepted5accounting
5principles.5Their5role5was5substantially5reduced5in519735when5the5Financi
al5Accounting5Standards5Board5was5established.5 Their5role5was5further5re
duced5with5the5establishment5of5the5Public5Company5Accounting5Oversig
ht5Board5was5established5in52002.
b. The5Financial5Accounting5Standards5Board5replaced5the5Accounting5
Principles5Board5as5the5primary5rule-
making5body5for5accounting5standards.5It5is5an5independent5organiza
tion5and5includes5members5other5than5public5accountants.
c. The5SEC5has5the5authority5to5determine5generally5accepted5accounting5
principles5and5to5regulate5the5accounting5profession.5The5SEC5has5elect
ed5to5leave5much5of5the5determination5of5generally5accepted5accounting5
principles5to5the5private5sector.5 The5Financial5Accounting5Standards5Bo
ard5has5played5the5major5role5in5establishing5accounting5standards5sinc
e51973.5 Regulation5of5the5accounting5profession5was5substantially5turne
d5over5to5the5Public5Company5Accounting5Oversight5Board5in52002.
1-52.
Consistency5is5obtained5through5the5application5of5the5same5accounting5
principle5from5period5to5period.5 A5change5in5principle5requires5statement5
disclosure.
1-53.
The5concept5of5historical5cost5determines5the5balance5sheet5valuation5of5land.5T
he5realization5concept5requires5that5a5transaction5needs5to5occur5for5the5profit5to5
be5recognized.
1-54. a.5 Entity e.5 Historical5cost
b. Realization f.5 Historical5cost
c. Materiality g.5 Disclosure
d. Conservatism
1-55. Entity5concept
,1-56.
Generally5accepted5accounting5principles5do5not5apply5when5a5firm5does5not5
appear5to5be5a5going5concern.5 If5the5decision5is5made5that5this5is5not5a5going5c
oncern,5then5the5use5of5GAAP5would5not5be5appropriate.
1-57.
With5the5time5period5assumption,5inaccuracies5of5accounting5for5the5entity,5shor
t5of5its5complete5life5span,5are5accepted.5The5assumption5is5made5that5the5entity
5can5be5accounted5for5reasonably5accurately5for5a5particular5period5of5time.5 In5
other5words,5the5decision5is5made5to5accept5some5inaccuracy5because5of5inco
mplete5information5about5the5future5in5exchange5for5more5timely5reporting.5 The5
statements5are5considered5to5be5meaningful5because5material5inaccuracies5are
5not5acceptable.
1- 8.5 5 It5is5true5that5the5only5accurate5way5to5account5for5the5success5or5failure5of5an5ent
ity5is5to5accumulate5all5transactions5from5the5opening5of5business5until5the5busi
ness5eventually5liquidates.5 But5it5is5not5necessary5that5the5statements5be5com
pletely5accurate5in5order5for5them5to5be5meaningful.
1- 9. a. A5year5that5ends5when5operations5are5at5a5low5ebb5for5the5year.
b. The5accounting5time5period5is5ended5on5December531.
c. A5twelve-
month5accounting5period5that5ends5at5the5end5of5a5month5other5than5Dece
mber531.
1-10. Money.
1-
11.5 5 When5money5does5not5hold5a5stable5value,5the5financial5statements5can5
lose5much5of5their5significance.5 To5the5extent5that5money5does5not5remain5sta
ble,5it5loses5usefulness5as5the5standard5for5measuring5financial5transactions.
1-12.
No.5 There5is5a5problem5with5determining5the5index5in5order5to5adjust5the5state
ments.5 The5items5that5are5included5in5the5index5must5be5representative.5In5add
ition,5the5prices5of5items5change5because5of5various5factors,5such5as5quality,5te
chnology,5and5inflation.
Yes.5A5reasonable5adjustment5to5the5statements5can5be5made5for5inflation.
1-13. False.5 An5arbitrary5write-
off5of5inventory5cannot5be5justified5under5the5conservatism5concept.5 The5cons
ervatism5concept5can5only5be5applied5where5there5are5alternative5measureme
nts5and5each5of5these5alternative5measurements5has5reasonable5support.
, 1-14.
Yes,5inventory5that5has5a5market5value5below5the5historical5cost5should5be5wri
tten5down5in5order5to5recognize5a5loss.5 This5is5done5based5upon5the5concept5
of5conservatism.5 Losses5that5can5be5reasonably5anticipated5should5be5taken5
in5order5to5reflect5the5least5favorable5effect5on5net5income5of5the5current5perio
d.
