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