Solution Manual for Financial Statement Analysis, 13th Edition By Charles H. Gibson

13 p

, Chapter1 Introductionto FinancialReporting
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QUESTIONS

1- 1. a. TheAICPAisanorganizationofCPAsthatpriorto1973acceptedtheprimary v




responsibilityforthedevelopmentofgenerallyacceptedaccountingprinciples.Their
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rolewassubstantiallyreducedin1973whentheFinancialAccountingStandards
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Boardwasestablished. Theirrolewasfurtherreducedwiththeestablishmentofthe
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Public CompanyAccountingOversightBoardwas establishedin2002.
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b. TheFinancialAccountingStandardsBoardreplacedtheAccountingPrinciples v




vBoardas theprimaryrule-makingbodyforaccountingstandards.Itis an
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vindependentorganizationandincludes membersotherthanpublicaccountants.
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c. TheSEChastheauthoritytodeterminegenerallyacceptedaccountingprinciplesand v v




vtoregulatetheaccountingprofession.TheSEC haselectedtoleavemuchofthe
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determinationofgenerallyacceptedaccountingprinciplestotheprivatesector.
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vTheFinancialAccountingStandardsBoardhasplayedthemajorroleinestablishing v v




vaccountingstandardssince1973. Regulationoftheaccountingprofessionwas
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substantiallyturnedovertothePublicCompanyAccountingOversightBoardin
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v2002.

1-2. Consistencyisobtainedthroughtheapplicationofthesameaccountingprinciplefrom v v




vperiodtoperiod. Achangeinprinciplerequires statementdisclosure.
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1-3. Theconceptofhistoricalcostdeterminesthebalancesheetvaluationofland.Therealization v v




vconceptrequiresthatatransactionneedstooccurfortheprofittoberecognized.
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1-4. a. Entity
v e. Historicalcost
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b. Realization f. Historicalcost
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c. Materiality g. Disclosure
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d. Conservatism

1-5. Entityconcept

,1-6. Generallyacceptedaccountingprinciplesdonotapplywhenafirmdoesnotappeartobe
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agoingconcern. Ifthedecisionis madethatthisisnotagoingconcern,thentheuseofGAAP
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wouldnotbeappropriate. v




1-7. Withthetimeperiodassumption,inaccuraciesofaccountingfortheentity,shortofits
completelifespan,areaccepted.Theassumptionismadethattheentitycanbeaccountedfor
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vreasonablyaccuratelyforaparticularperiodoftime. Inotherwords,thedecisionismade v




vtoacceptsomeinaccuracybecauseofincompleteinformationaboutthefutureinexchang v




e formoretimelyreporting. Thestatementsareconsideredtobemeaningfulbecause
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materialinaccuracies arenotacceptable.
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1- 8. It is true that the only accurate way to account for the success or failure of an entity is to
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accumulate all transactions from the opening of business until the business eventually
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liquidates. But it is not necessary that the statements be completely accurate in order for
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themtobemeaningful. v




1- 9. a. Ayearthatendswhenoperationsareatalowebbfortheyear.
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b. TheaccountingtimeperiodisendedonDecember31.

c. A twelve-monthaccountingperiodthatendsattheendofamonthotherthan
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vDecember31.
1-10. Money.

1-11. v v When money does not hold a stable value, the financial statements can lose much of their
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significance. To the extent that money does not remain stable, it loses usefulness as the
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standardformeasuringfinancialtransactions.
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1-12. No. Thereisaproblemwithdeterminingtheindexinordertoadjustthestatements. The
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itemsthatareincludedintheindexmustberepresentative.Inaddition,thepricesofitems
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changebecauseofvariousfactors,suchasquality,technology,andinflation.
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Yes.Areasonableadjustmenttothestatementscanbemadeforinflation.

1-13. False. Anarbitrarywrite-offofinventorycannotbejustifiedundertheconservatism
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concept. Theconservatismconceptcanonlybeappliedwheretherearealternative
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measurementsandeachofthesealternativemeasurementshasreasonablesupport.
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1-14. Yes,inventorythathasamarketvaluebelowthehistoricalcostshouldbewrittendownin
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ordertorecognizealoss. Thisisdonebasedupontheconceptofconservatism. Lossesthat
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vcanbereasonablyanticipatedshouldbetakeninordertoreflecttheleastfavorable v




veffectonnetincomeofthecurrentperiod.

, 1-15. Endofproduction

Therealizationofrevenueatthecompletionoftheproductionprocessisacceptablewhenthe v v v




vpriceoftheitemisknownandthereisareadymarket.

Receiptofcash

Thismethodshouldonlybeusedwhentheprospectsofcollectionareespeciallydoubtfulatthe
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vtimeofsale.

Duringproduction

Thismethodisallowedforlong-termconstructionprojectsbecauserecognizingrevenueon
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vlong-termconstructionprojectsasworkprogressestendstogiveafairerpictureofthe
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vresultsforagivenperiodincomparisonwithhavingtheentirerevenuerealizedinone
vperiodoftime.

1-16. vItisdifficulttoapplythematchingconceptwhenthereisnodirectconnectionbetweenthecost
v andrevenue. vUnderthesecircumstances, accountantsoftenchargeoffthecostintheperiod
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v incurredinordertobeconservative.

1-17. Iftheentitycanjustifytheuseofanalternativeaccountingmethodonthebasisthatitis v v




v rational, thenthechangecanbemade.
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1-18. Theaccountingreportsmustdiscloseallfacts thatmayinfluencethejudgmentofaninformed
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vreader. Usuallythisisajudgmentdecisionfortheaccountanttomake. Becauseofthe
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complexityofmanybusinessesandtheincreasedexpectations ofthepublic,thefull
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vdisclosureconcepthasbecomeoneofthemostdifficultconceptsfortheaccountanttoapply.

1-19. Thereis apreferencefortheuseofobjectivityinthepreparationoffinancialstatements,
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vbutfinancialstatementscannotbecompletelypreparedbaseduponobjectivedata; v




vestimatesmustbemadeinmanysituations.

1-20. Thisisatruestatement. Theconceptofmaterialityallowstheaccountanttohandle
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vimmaterialitemsinthemosteconomicalandexpedientmannerpossible.

1-21. Someindustrypracticesleadtoaccountingreportsthatdonotconformtogenerally
vacceptedaccountingprinciples. Thesereportsareconsideredtobeacceptable,butthe
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accountingprofessionismakinganefforttoeliminateparticularindustrypracticesthatdo
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vnotconformtothenormalgenerallyacceptedaccountingprinciples.

1-22. Eventsthatfalloutsideofthefinancialtransactionsoftheentityarenotrecorded. v v An
vexamplewouldbethelossofamajorcustomer.