Solution Manual For Financial Statement Analysis,
m m m m m
13th Edition
m
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
m m m m m m m m m m m
, Chapter 1 m
m Introduction to Financial m m
m Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
m m m m m m m m m m m m
primary responsibility for the development of generally accepted
m m m m m m m m
accounting principles. Their role was substantially reduced in 1973 when
m m m m m m m m m m
the Financial Accounting Standards Board was established. Their role
m m m m m m m m m
was further reduced with the establishment of the Public Company
m m m m m m m m m m
Accounting Oversight Board was established in 2002.
m m m m m m m
b. The Financial Accounting Standards Board replaced the Accounting
m m m m m m m
Principles Board as the primary rule-making body for accounting
m m m m m m m m m
standards. It is an independent organization and includes members
m m m m m m m m m
other than public accountants.
m m m m
c. The SEC has the authority to determine generally accepted accounting
m m m m m m m m m
principles and to regulate the accounting profession. The SEC has
m m m m m m m m m m
elected to leave much of the determination of generally accepted
m m m m m m m m m m
accounting principles to the private sector. The Financial Accounting
m m m m m m m m m
Standards Board has played the major role in establishing accounting
m m m m m m m m m m
standards since 1973. Regulation of the accounting profession was
m m m m m m m m m
substantially turned over to the Public Company Accounting Oversight
m m m m m m m m m
Board in 2002.
m m m
1- 2.
m Consistency is obtained through the application of the same accounting
m m m m m m m m m
principle from period to period. A change in principle requires
m m m m m m m m m m
statement disclosure.
m m
1- 3.
m The concept of historical cost determines the balance sheet valuation of land.
m m m m m m m m m m m
The realization concept requires that a transaction needs to occur for the profit
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to be recognized.
m m m
1- 4.
m a. Entity
m e. Historical cost
m m
b. Realization f. Historical cost
m m
c. Materiality g. Disclosure m
d. Conservatism
1- 5.
m Entity concept
m
,1- 6.
m Generally accepted accounting principles do not apply when a firm does not
m m m m m m m m m m m
appear to be a going concern. If the decision is made that this is not a
m m m m m m m m m m m m m m m m
going concern, then the use of GAAP would not be appropriate.
m m m m m m m m m m m
1- 7.
m With the time period assumption, inaccuracies of accounting for the entity,
m m m m m m m m m m
short of its complete life span, are accepted. The assumption is made that the
m m m m m m m m m m m m m m
entity can be accounted for reasonably accurately for a particular period of
m m m m m m m m m m m m
time. In other words, the decision is made to accept some inaccuracy
m m m m m m m m m m m m
because of incomplete information about the future in exchange for more
m m m m m m m m m m m
timely reporting. The statements are considered to be meaningful because
m m m m m m m m m m
material inaccuracies are not acceptable.
m m m m m
1- 8. m m It is true that the only accurate way to account for the success or failure of an
m m m m m m m m m m m m m m m m
mentity is to accumulate all transactions from the opening of business until the
m m m m m m m m m m m m
mbusiness eventually liquidates. But it is not necessary that the statements be
m m m m m m m m m m m
mcompletely accurate in order for them to be meaningful. m m m m m m m m
1- 9. a. A year that ends when operations are at a low ebb for the year.
m m m m m m m m m m m m m
b. The accounting time period is ended on December 31.
m m m m m m m m
c. A twelve-month accounting period that ends at the end of a month other
m m m m m m m m m m m m
than December 31.
m m m
1-10. Money.
1-11. m m When money does not hold a stable value, the financial statements can lose
m m m m m m m m m m m m
much of their significance. To the extent that money does not remain stable,
m m m m m m m m m m m m m
it loses usefulness as the standard for measuring financial transactions.
m m m m m m m m m m
1-12. No. There is a problem with determining the index in order to adjust the
m m m m m m m m m m m m m
statements. The items that are included in the index must be
m m m m m m m m m m m
representative. In addition, the prices of items change because of various
m m m m m m m m m m m
factors, such as quality, technology, and inflation.
m m m m m m m
Yes. A reasonable adjustment to the statements can be made for inflation.
m m m m m m m m m m m
1-13. False. An arbitrary write-off of inventory cannot be justified under the
m m m m m m m m m m
conservatism concept. The conservatism concept can only be applied
m m m m m m m m m
where there are alternative measurements and each of these alternative
m m m m m m m m m m
measurements has reasonable support.
m m m m
1-14. Yes, inventory that has a market value below the historical cost should be
m m m m m m m m m m m m
written down in order to recognize a loss. This is done based upon the
m m m m m m m m m m m m m m
concept of conservatism. Losses that can be reasonably anticipated
m m m m m m m m m
should be taken in order to reflect the least favorable effect on net income
m m m m m m m m m m m m m m
of the current period.
m m m m
, 1-15. End of production
m m
The realization of revenue at the completion of the production process is
m m m m m m m m m m m
acceptable when the price of the item is known and there is a ready market.
m m m m m m m m m m m m m m m
Receipt of cash m m
This method should only be used when the prospects of collection are
m m m m m m m m m m m
especially doubtful at the time of sale.
m m m m m m m
During production m
This method is allowed for long-term construction projects because
m m m m m m m m
recognizing revenue on long-term construction projects as work progresses
m m m m m m m m m
tends to give a fairer picture of the results for a given period in comparison
m m m m m m m m m m m m m m m
with having the entire revenue realized in one period of time.
m m m m m m m m m m m
1-16. It is difficult to apply the matching concept when there is no direct connection
m m m m m m m m m m m m m
mbetween the cost and revenue. Under these circumstances, accountants
m m m m m m m m
moften charge off the cost in the period incurred in order to be conservative.
m m m m m m m m m m m m m
1-17. If the entity can justify the use of an alternative accounting method on the
m m m m m m m m m m m m m
mbasis that it is rational, then the change can be made.
m m m m m m m m m m
1-18. The accounting reports must disclose all facts that may influence the
m m m m m m m m m m
judgment of an informed reader. Usually this is a judgment decision for the
m m m m m m m m m m m m m
accountant to make. Because of the complexity of many businesses and
m m m m m m m m m m m
the increased expectations of the public, the full disclosure concept has
m m m m m m m m m m m
become one of the most difficult concepts for the accountant to apply.
m m m m m m m m m m m m
1-19. There is a preference for the use of objectivity in the preparation of financial
m m m m m m m m m m m m m
statements, but financial statements cannot be completely prepared based
m m m m m m m m m
upon objective data; estimates must be made in many situations.
m m m m m m m m m m
1-20. This is a true statement. The concept of materiality allows the accountant to
m m m m m m m m m m m m
handle immaterial items in the most economical and expedient manner
m m m m m m m m m m
possible.
m
1-21. Some industry practices lead to accounting reports that do not conform to
m m m m m m m m m m m
generally accepted accounting principles. These reports are considered to be
m m m m m m m m m m
acceptable, but the accounting profession is making an effort to eliminate
m m m m m m m m m m m
particular industry practices that do not conform to the normal generally
m m m m m m m m m m m
accepted accounting principles.
m m m
1-22. Events that fall outside of the financial transactions of the entity are not
m m m m m m m m m m m m
recorded. An example would be the loss of a major customer.
m m m m m m m m m m m
m m m m m
13th Edition
m
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
m m m m m m m m m m m
, Chapter 1 m
m Introduction to Financial m m
m Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
m m m m m m m m m m m m
primary responsibility for the development of generally accepted
m m m m m m m m
accounting principles. Their role was substantially reduced in 1973 when
m m m m m m m m m m
the Financial Accounting Standards Board was established. Their role
m m m m m m m m m
was further reduced with the establishment of the Public Company
m m m m m m m m m m
Accounting Oversight Board was established in 2002.
m m m m m m m
b. The Financial Accounting Standards Board replaced the Accounting
m m m m m m m
Principles Board as the primary rule-making body for accounting
m m m m m m m m m
standards. It is an independent organization and includes members
m m m m m m m m m
other than public accountants.
m m m m
c. The SEC has the authority to determine generally accepted accounting
m m m m m m m m m
principles and to regulate the accounting profession. The SEC has
m m m m m m m m m m
elected to leave much of the determination of generally accepted
m m m m m m m m m m
accounting principles to the private sector. The Financial Accounting
m m m m m m m m m
Standards Board has played the major role in establishing accounting
m m m m m m m m m m
standards since 1973. Regulation of the accounting profession was
m m m m m m m m m
substantially turned over to the Public Company Accounting Oversight
m m m m m m m m m
Board in 2002.
m m m
1- 2.
m Consistency is obtained through the application of the same accounting
m m m m m m m m m
principle from period to period. A change in principle requires
m m m m m m m m m m
statement disclosure.
m m
1- 3.
m The concept of historical cost determines the balance sheet valuation of land.
m m m m m m m m m m m
The realization concept requires that a transaction needs to occur for the profit
m m m m m m m m m m m m m
to be recognized.
m m m
1- 4.
m a. Entity
m e. Historical cost
m m
b. Realization f. Historical cost
m m
c. Materiality g. Disclosure m
d. Conservatism
1- 5.
m Entity concept
m
,1- 6.
m Generally accepted accounting principles do not apply when a firm does not
m m m m m m m m m m m
appear to be a going concern. If the decision is made that this is not a
m m m m m m m m m m m m m m m m
going concern, then the use of GAAP would not be appropriate.
m m m m m m m m m m m
1- 7.
m With the time period assumption, inaccuracies of accounting for the entity,
m m m m m m m m m m
short of its complete life span, are accepted. The assumption is made that the
m m m m m m m m m m m m m m
entity can be accounted for reasonably accurately for a particular period of
m m m m m m m m m m m m
time. In other words, the decision is made to accept some inaccuracy
m m m m m m m m m m m m
because of incomplete information about the future in exchange for more
m m m m m m m m m m m
timely reporting. The statements are considered to be meaningful because
m m m m m m m m m m
material inaccuracies are not acceptable.
m m m m m
1- 8. m m It is true that the only accurate way to account for the success or failure of an
m m m m m m m m m m m m m m m m
mentity is to accumulate all transactions from the opening of business until the
m m m m m m m m m m m m
mbusiness eventually liquidates. But it is not necessary that the statements be
m m m m m m m m m m m
mcompletely accurate in order for them to be meaningful. m m m m m m m m
1- 9. a. A year that ends when operations are at a low ebb for the year.
m m m m m m m m m m m m m
b. The accounting time period is ended on December 31.
m m m m m m m m
c. A twelve-month accounting period that ends at the end of a month other
m m m m m m m m m m m m
than December 31.
m m m
1-10. Money.
1-11. m m When money does not hold a stable value, the financial statements can lose
m m m m m m m m m m m m
much of their significance. To the extent that money does not remain stable,
m m m m m m m m m m m m m
it loses usefulness as the standard for measuring financial transactions.
m m m m m m m m m m
1-12. No. There is a problem with determining the index in order to adjust the
m m m m m m m m m m m m m
statements. The items that are included in the index must be
m m m m m m m m m m m
representative. In addition, the prices of items change because of various
m m m m m m m m m m m
factors, such as quality, technology, and inflation.
m m m m m m m
Yes. A reasonable adjustment to the statements can be made for inflation.
m m m m m m m m m m m
1-13. False. An arbitrary write-off of inventory cannot be justified under the
m m m m m m m m m m
conservatism concept. The conservatism concept can only be applied
m m m m m m m m m
where there are alternative measurements and each of these alternative
m m m m m m m m m m
measurements has reasonable support.
m m m m
1-14. Yes, inventory that has a market value below the historical cost should be
m m m m m m m m m m m m
written down in order to recognize a loss. This is done based upon the
m m m m m m m m m m m m m m
concept of conservatism. Losses that can be reasonably anticipated
m m m m m m m m m
should be taken in order to reflect the least favorable effect on net income
m m m m m m m m m m m m m m
of the current period.
m m m m
, 1-15. End of production
m m
The realization of revenue at the completion of the production process is
m m m m m m m m m m m
acceptable when the price of the item is known and there is a ready market.
m m m m m m m m m m m m m m m
Receipt of cash m m
This method should only be used when the prospects of collection are
m m m m m m m m m m m
especially doubtful at the time of sale.
m m m m m m m
During production m
This method is allowed for long-term construction projects because
m m m m m m m m
recognizing revenue on long-term construction projects as work progresses
m m m m m m m m m
tends to give a fairer picture of the results for a given period in comparison
m m m m m m m m m m m m m m m
with having the entire revenue realized in one period of time.
m m m m m m m m m m m
1-16. It is difficult to apply the matching concept when there is no direct connection
m m m m m m m m m m m m m
mbetween the cost and revenue. Under these circumstances, accountants
m m m m m m m m
moften charge off the cost in the period incurred in order to be conservative.
m m m m m m m m m m m m m
1-17. If the entity can justify the use of an alternative accounting method on the
m m m m m m m m m m m m m
mbasis that it is rational, then the change can be made.
m m m m m m m m m m
1-18. The accounting reports must disclose all facts that may influence the
m m m m m m m m m m
judgment of an informed reader. Usually this is a judgment decision for the
m m m m m m m m m m m m m
accountant to make. Because of the complexity of many businesses and
m m m m m m m m m m m
the increased expectations of the public, the full disclosure concept has
m m m m m m m m m m m
become one of the most difficult concepts for the accountant to apply.
m m m m m m m m m m m m
1-19. There is a preference for the use of objectivity in the preparation of financial
m m m m m m m m m m m m m
statements, but financial statements cannot be completely prepared based
m m m m m m m m m
upon objective data; estimates must be made in many situations.
m m m m m m m m m m
1-20. This is a true statement. The concept of materiality allows the accountant to
m m m m m m m m m m m m
handle immaterial items in the most economical and expedient manner
m m m m m m m m m m
possible.
m
1-21. Some industry practices lead to accounting reports that do not conform to
m m m m m m m m m m m
generally accepted accounting principles. These reports are considered to be
m m m m m m m m m m
acceptable, but the accounting profession is making an effort to eliminate
m m m m m m m m m m m
particular industry practices that do not conform to the normal generally
m m m m m m m m m m m
accepted accounting principles.
m m m
1-22. Events that fall outside of the financial transactions of the entity are not
m m m m m m m m m m m m
recorded. An example would be the loss of a major customer.
m m m m m m m m m m m
