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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 |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.
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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.
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.
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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.
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.
3
1
,|
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 |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
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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.
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.
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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.
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.
3
