Solution Manual for Financial Reporting and Analysis, 13th
Edition Charles H. Gibson Chapter 1-13
Chapter 1
Introduction to Financial Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the primary
responsibility for the development of generally accepted accounting principles.
Their role was substantially reduced in 1973 when the Financial Accounting
Standards Board was established. Their role was further reduced with the
establishment of the Public Company Accounting Oversight Board was
established in 2002.
b. The Financial Accounting Standards Board replaced the Accounting Principles Board
as the primary rule-making body for accounting standards. It is an independent
organization and includes members other than public accountants.
c. The SEC has the authority to determine generally accepted accounting principles
and to regulate the accounting profession. The SEC has elected to leave much of
the determination of generally accepted accounting principles to the private
sector. The Financial Accounting Standards Board has played the major role in
establishing accounting standards since 1973. Regulation of the accounting
1
, profession was substantially turned over to the Public Company Accounting
Oversight Board in 2002.
1- 2. Consistency is obtained through the application of the same accounting principle from
period to period. A change in principle requires statement disclosure.
1- 3. The concept of historical cost determines the balance sheet valuation of land. The
realization concept requires that a transaction needs to occur for the profit to be
recognized.
1- 4. a. Entity e. Historical cost
b. Realization f. Historical cost
c. Materiality g. Disclosure
d. Conservatism
1- 5. Entity concept
1- 6. Generally accepted accounting principles do not apply when a firm does not appear to
be a going concern. If the decision is made that this is not a going concern, then the
use of GAAP would not be appropriate.
2
,1- 7. With the time period assumption, inaccuracies of accounting for the entity, short of its
complete life span, are accepted. The assumption is made that the entity can be
accounted for reasonably accurately for a particular period of time. In other words,
the decision is made to accept some inaccuracy because of incomplete information
about the future in exchange for more timely reporting. The statements are considered
to be meaningful because material inaccuracies are not acceptable.
1- 8. It is true that the only accurate way to account for the success or failure of an entity is
to accumulate all transactions from the opening of business until the business
eventually liquidates. But it is not necessary that the statements be completely
accurate in order for them to be meaningful.
1- 9. a. A year that ends when operations are at a low ebb for the year.
b. The accounting time period is ended on December 31.
c. A twelve-month accounting period that ends at the end of a month other than
December 31.
1-10. Money.
1-11. When money does not hold a stable value, the financial statements can lose much of
their significance. To the extent that money does not remain stable, it loses usefulness
as the standard for measuring financial transactions.
3
, 1-12. No. There is a problem with determining the index in order to adjust the statements.
The items that are included in the index must be representative. In addition, the prices
of items change because of various factors, such as quality, technology, and inflation.
Yes. A reasonable adjustment to the statements can be made for inflation.
1-13. False. An arbitrary write-off of inventory cannot be justified under the conservatism
concept. The conservatism concept can only be applied where there are alternative
measurements and each of these alternative measurements has reasonable support.
1-14. Yes, inventory that has a market value below the historical cost should be written
down in order to recognize a loss. This is done based upon the concept of
conservatism. Losses that can be reasonably anticipated should be taken in order to
reflect the least favorable effect on net income of the current period.
4
Edition Charles H. Gibson Chapter 1-13
Chapter 1
Introduction to Financial Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the primary
responsibility for the development of generally accepted accounting principles.
Their role was substantially reduced in 1973 when the Financial Accounting
Standards Board was established. Their role was further reduced with the
establishment of the Public Company Accounting Oversight Board was
established in 2002.
b. The Financial Accounting Standards Board replaced the Accounting Principles Board
as the primary rule-making body for accounting standards. It is an independent
organization and includes members other than public accountants.
c. The SEC has the authority to determine generally accepted accounting principles
and to regulate the accounting profession. The SEC has elected to leave much of
the determination of generally accepted accounting principles to the private
sector. The Financial Accounting Standards Board has played the major role in
establishing accounting standards since 1973. Regulation of the accounting
1
, profession was substantially turned over to the Public Company Accounting
Oversight Board in 2002.
1- 2. Consistency is obtained through the application of the same accounting principle from
period to period. A change in principle requires statement disclosure.
1- 3. The concept of historical cost determines the balance sheet valuation of land. The
realization concept requires that a transaction needs to occur for the profit to be
recognized.
1- 4. a. Entity e. Historical cost
b. Realization f. Historical cost
c. Materiality g. Disclosure
d. Conservatism
1- 5. Entity concept
1- 6. Generally accepted accounting principles do not apply when a firm does not appear to
be a going concern. If the decision is made that this is not a going concern, then the
use of GAAP would not be appropriate.
2
,1- 7. With the time period assumption, inaccuracies of accounting for the entity, short of its
complete life span, are accepted. The assumption is made that the entity can be
accounted for reasonably accurately for a particular period of time. In other words,
the decision is made to accept some inaccuracy because of incomplete information
about the future in exchange for more timely reporting. The statements are considered
to be meaningful because material inaccuracies are not acceptable.
1- 8. It is true that the only accurate way to account for the success or failure of an entity is
to accumulate all transactions from the opening of business until the business
eventually liquidates. But it is not necessary that the statements be completely
accurate in order for them to be meaningful.
1- 9. a. A year that ends when operations are at a low ebb for the year.
b. The accounting time period is ended on December 31.
c. A twelve-month accounting period that ends at the end of a month other than
December 31.
1-10. Money.
1-11. When money does not hold a stable value, the financial statements can lose much of
their significance. To the extent that money does not remain stable, it loses usefulness
as the standard for measuring financial transactions.
3
, 1-12. No. There is a problem with determining the index in order to adjust the statements.
The items that are included in the index must be representative. In addition, the prices
of items change because of various factors, such as quality, technology, and inflation.
Yes. A reasonable adjustment to the statements can be made for inflation.
1-13. False. An arbitrary write-off of inventory cannot be justified under the conservatism
concept. The conservatism concept can only be applied where there are alternative
measurements and each of these alternative measurements has reasonable support.
1-14. Yes, inventory that has a market value below the historical cost should be written
down in order to recognize a loss. This is done based upon the concept of
conservatism. Losses that can be reasonably anticipated should be taken in order to
reflect the least favorable effect on net income of the current period.
4
