Solution Manual For Financial Statement Analysis,
| | | | |
13th Edition
|
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
| | | | | | | | | | |
, 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- |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.
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.
, 1-15. End |of |production
The |realization |of |revenue |at |the |completion |of |the |production |process |is
|acceptable |when |the |price |of |the |item |is |known |and |there |is |a |ready |market.
Receipt |of |cash
This |method |should |only |be |used |when |the |prospects |of |collection |are |especially
|doubtful |at |the |time |of |sale.
During |production
This |method |is |allowed |for |long-term |construction |projects |because
|recognizing |revenue |on |long-term |construction |projects |as |work |progresses
|tends |to |give |a |fairer |picture |of |the |results |for |a |given |period |in |comparison
|with |having |the |entire |revenue |realized |in |one |period |of |time.
1-16. It |is |difficult |to |apply |the |matching |concept |when |there |is |no |direct |connection
|between |the |cost |and |revenue. | Under |these |circumstances, |accountants
|often |charge |off |the |cost |in |the |period |incurred |in |order |to |be |conservative.
1-17. If |the |entity |can |justify |the |use |of |an |alternative |accounting |method |on |the
|basis |that |it |is |rational, |then |the |change |can |be |made.
1-18. The |accounting |reports |must |disclose |all |facts |that |may |influence |the
|judgment |of |an |informed |reader. | Usually |this |is |a |judgment |decision |for |the
|accountant |to |make. | Because |of |the |complexity |of |many |businesses |and |the
|increased |expectations |of |the |public, |the |full |disclosure |concept |has |become
|one |of |the |most |difficult |concepts |for |the |accountant |to |apply.
1-19. There |is |a |preference |for |the |use |of |objectivity |in |the |preparation |of |financial
|statements, |but |financial |statements |cannot |be |completely |prepared |based
|upon |objective |data; |estimates |must |be |made |in |many |situations.
1-20. This |is |a |true |statement. | The |concept |of |materiality |allows |the |accountant |to
|handle |immaterial |items |in |the |most |economical |and |expedient |manner
|possible.
1-21. Some |industry |practices |lead |to |accounting |reports |that |do |not |conform |to
|generally |accepted |accounting |principles. | These |reports |are |considered |to |be
|acceptable, |but |the |accounting |profession |is |making |an |effort |to |eliminate
|particular |industry |practices |that |do |not |conform |to |the |normal |generally
|accepted |accounting |principles.
1-22. Events |that |fall |outside |of |the |financial |transactions |of |the |entity |are |not
|recorded. | An |example |would |be |the |loss |of |a |major |customer.
| | | | |
13th Edition
|
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
| | | | | | | | | | |
, 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- |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.
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.
, 1-15. End |of |production
The |realization |of |revenue |at |the |completion |of |the |production |process |is
|acceptable |when |the |price |of |the |item |is |known |and |there |is |a |ready |market.
Receipt |of |cash
This |method |should |only |be |used |when |the |prospects |of |collection |are |especially
|doubtful |at |the |time |of |sale.
During |production
This |method |is |allowed |for |long-term |construction |projects |because
|recognizing |revenue |on |long-term |construction |projects |as |work |progresses
|tends |to |give |a |fairer |picture |of |the |results |for |a |given |period |in |comparison
|with |having |the |entire |revenue |realized |in |one |period |of |time.
1-16. It |is |difficult |to |apply |the |matching |concept |when |there |is |no |direct |connection
|between |the |cost |and |revenue. | Under |these |circumstances, |accountants
|often |charge |off |the |cost |in |the |period |incurred |in |order |to |be |conservative.
1-17. If |the |entity |can |justify |the |use |of |an |alternative |accounting |method |on |the
|basis |that |it |is |rational, |then |the |change |can |be |made.
1-18. The |accounting |reports |must |disclose |all |facts |that |may |influence |the
|judgment |of |an |informed |reader. | Usually |this |is |a |judgment |decision |for |the
|accountant |to |make. | Because |of |the |complexity |of |many |businesses |and |the
|increased |expectations |of |the |public, |the |full |disclosure |concept |has |become
|one |of |the |most |difficult |concepts |for |the |accountant |to |apply.
1-19. There |is |a |preference |for |the |use |of |objectivity |in |the |preparation |of |financial
|statements, |but |financial |statements |cannot |be |completely |prepared |based
|upon |objective |data; |estimates |must |be |made |in |many |situations.
1-20. This |is |a |true |statement. | The |concept |of |materiality |allows |the |accountant |to
|handle |immaterial |items |in |the |most |economical |and |expedient |manner
|possible.
1-21. Some |industry |practices |lead |to |accounting |reports |that |do |not |conform |to
|generally |accepted |accounting |principles. | These |reports |are |considered |to |be
|acceptable, |but |the |accounting |profession |is |making |an |effort |to |eliminate
|particular |industry |practices |that |do |not |conform |to |the |normal |generally
|accepted |accounting |principles.
1-22. Events |that |fall |outside |of |the |financial |transactions |of |the |entity |are |not
|recorded. | An |example |would |be |the |loss |of |a |major |customer.
