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.
