Solution manual financial statement analysis 13th edition charles h gibson

Solution Manual for Financial Statement Analysis,
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13th Edition by Charles H. Gibson,
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Verified Chapter's 1 - 13 | Complete
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, Chapter 1 Introductionto V V V




FinancialReporting
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QUESTIONS

1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the primary
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responsibility for the development of generally accepted accounting principles. Their
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role was substantially reduced in 1973 when the Financial Accounting Standards
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Board was established. Their role was further reduced with the establishment of the
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Public Company Accounting Oversight Board was established in 2002.
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b. The Financial Accounting Standards Board replaced the Accounting Principles
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Board as the primary rule-making body for accounting standards. It is an
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independent organization and includes members other than public accountants.
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c. The SEC has the authority to determine generally accepted accounting principles and
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to regulate the accounting profession. The SEC has elected to leave much of the
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determination of generally accepted accounting principles to the private sector.
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VThe Financial Accounting Standards Board has played the major role in establishing
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accounting standards since 1973. Regulation of the accounting profession was
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substantially turned over to the Public Company Accounting Oversight Board in
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2002.
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1- 2.
V Consistency is obtained through the application of the same accounting principle from
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period to period. A change in principle requires statement disclosure.
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1- 3.
V The concept of historical cost determines the balance sheet valuation of land. The realization
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concept requires that a transaction needs to occur for the profit to be recognized.
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1- 4.
V a. Entity
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b. Realization f. Historical cost V V




c. Materiality g. Disclosure V




d. Conservatism

1- 5.
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,1- 6.
V Generally accepted accounting principles do not apply when a firm does not appear to be V V V V V V V V V V V V V V




a going concern. If the decision is made that this is not a going concern, then the use of GAAP
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would not be appropriate.
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1- 7.
V With the time period assumption, inaccuracies of accounting for the entity, short of its
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complete life span, are accepted. The assumption is made that the entity can be accounted for
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reasonably accurately for a particular period of time. In other words, the decision is made
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to accept some inaccuracy because of incomplete information about the future in exchange
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for more timely reporting. The statements are considered to be meaningful because
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material inaccuracies are not acceptable.
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1- 8. V V It is true that the only accurate way to account for the success or failure of an entity is to
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V accumulate all transactions from the opening of business until the business eventually V V V V V V V V V V V




V liquidates. But it is not necessary that the statements be completely accurate in order for V V V V V V V V V V V V V V




V them to be meaningful. V V V




1- 9. a. A year that ends when operations are at a low ebb for the year.
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b. The accounting time period is ended on December 31. V V V V V V V V




c. A twelve-month accounting period that ends at the end of a month other than
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December 31.
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1-10. Money.

1-11. V V When money does not hold a stable value, the financial statements can lose much of their
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significance. To the extent that money does not remain stable, it loses usefulness as the
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standard for measuring financial transactions.
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1-12. No. There is a problem with determining the index in order to adjust the statements. The
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items that are included in the index must be representative. In addition, the prices of items
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change because of various factors, such as quality, technology, and inflation.
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Yes. A reasonable adjustment to the statements can be made for inflation.
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1-13. False. An arbitrary write-off of inventory cannot be justified under the conservatism
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concept. The conservatism concept can only be applied where there are alternative
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measurements and each of these alternative measurements has reasonable support.
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1-14. Yes, inventory that has a market value below the historical cost should be written down in
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order to recognize a loss. This is done based upon the concept of conservatism. Losses that
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can be reasonably anticipated should be taken in order to reflect the least favorable
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effect on net income of the current period.
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, 1-15. Endof production V V




The realization of revenue at the completion of the production process is acceptable when the
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price of the item is known and there is a ready market.
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Receiptof cash V V




This method should only be used when the prospects of collection are especially doubtful at the
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time of sale.
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Duringproduction V




This method is allowed for long-term construction projects because recognizing revenue on
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long-term construction projects as work progresses tends to give a fairer picture of the
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results for a given period in comparison with having the entire revenue realized in one
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period of time.
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1-16. It is difficult to apply the matching concept when there is no direct connection between the cost
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and revenue. Under these circumstances, accountants often charge off the cost in the period
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incurred in order to be conservative.
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1-17. If the entity can justify the use of an alternative accounting method on the basis that it is
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rational, then the change can be made.
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1-18. The accounting reports must disclose all facts that may influence the judgment of an informed
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reader. Usually this is a judgment decision for the accountant to make. Because of the
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complexityof many businesses and the increased expectations of the public, the full
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disclosure concept has become one of the most difficult concepts for the accountant to apply.
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1-19. There is a preference for the use of objectivity in the preparation of financial statements,
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but financial statements cannot be completely prepared based upon objective data;
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estimates must be made in many situations.
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1-20. This is a true statement. The concept of materiality allows the accountant to handle
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immaterial items in the most economical and expedient manner possible.
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1-21. Some industry practices lead to accounting reports that do not conform to generally
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accepted accounting principles. These reports are considered to be acceptable, but the
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accounting profession is making an effort to eliminate particular industry practices that do
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not conform to the normal generally accepted accounting principles.
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1-22. Events that fall outside of the financial transactions of the entity are not recorded. An
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example would be the loss of a major customer.
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