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