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
,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.
2
,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
, 1-15. End hof hproduction
The hrealization hof hrevenue hat hthe hcompletion hof hthe hproduction hprocess his
hacceptable hwhen hthe hprice hof hthe hitem his hknown hand hthere his ha hready hmarket.
Receipt hof hcash
This hmethod hshould honly hbe hused hwhen hthe hprospects hof hcollection hare
hespecially hdoubtful hat hthe htime hof hsale.
During hproduction
This hmethod his hallowed hfor hlong-term hconstruction hprojects hbecause
hrecognizing hrevenue hon hlong-term hconstruction hprojects has hwork hprogresses
htends hto hgive ha hfairer hpicture hof hthe hresults hfor ha hgiven hperiod hin hcomparison
hwith hhaving hthe hentire hrevenue hrealized hin hone hperiod hof htime.
1-16. It his hdifficult hto happly hthe hmatching hconcept hwhen hthere his hno hdirect
hconnection hbetween hthe hcost hand hrevenue. h Under hthese hcircumstances,
haccountants hoften hcharge hoff hthe hcost hin hthe hperiod hincurred hin horder hto hbe
hconservative.
1-17. If hthe hentity hcan hjustify hthe huse hof han halternative haccounting hmethod hon
hthe hbasis hthat hit his hrational, hthen hthe hchange hcan hbe hmade.
1-18. The haccounting hreports hmust hdisclose hall hfacts hthat hmay hinfluence hthe
hjudgment hof han hinformed hreader. h Usually hthis his ha hjudgment hdecision hfor hthe
haccountant hto hmake. h Because hof hthe hcomplexity hof hmany hbusinesses hand
hthe hincreased hexpectations hof hthe hpublic, hthe hfull hdisclosure hconcept hhas
hbecome hone hof hthe hmost hdifficult hconcepts hfor hthe haccountant hto happly.
4
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
,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.
2
,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
, 1-15. End hof hproduction
The hrealization hof hrevenue hat hthe hcompletion hof hthe hproduction hprocess his
hacceptable hwhen hthe hprice hof hthe hitem his hknown hand hthere his ha hready hmarket.
Receipt hof hcash
This hmethod hshould honly hbe hused hwhen hthe hprospects hof hcollection hare
hespecially hdoubtful hat hthe htime hof hsale.
During hproduction
This hmethod his hallowed hfor hlong-term hconstruction hprojects hbecause
hrecognizing hrevenue hon hlong-term hconstruction hprojects has hwork hprogresses
htends hto hgive ha hfairer hpicture hof hthe hresults hfor ha hgiven hperiod hin hcomparison
hwith hhaving hthe hentire hrevenue hrealized hin hone hperiod hof htime.
1-16. It his hdifficult hto happly hthe hmatching hconcept hwhen hthere his hno hdirect
hconnection hbetween hthe hcost hand hrevenue. h Under hthese hcircumstances,
haccountants hoften hcharge hoff hthe hcost hin hthe hperiod hincurred hin horder hto hbe
hconservative.
1-17. If hthe hentity hcan hjustify hthe huse hof han halternative haccounting hmethod hon
hthe hbasis hthat hit his hrational, hthen hthe hchange hcan hbe hmade.
1-18. The haccounting hreports hmust hdisclose hall hfacts hthat hmay hinfluence hthe
hjudgment hof han hinformed hreader. h Usually hthis his ha hjudgment hdecision hfor hthe
haccountant hto hmake. h Because hof hthe hcomplexity hof hmany hbusinesses hand
hthe hincreased hexpectations hof hthe hpublic, hthe hfull hdisclosure hconcept hhas
hbecome hone hof hthe hmost hdifficult hconcepts hfor hthe haccountant hto happly.
4
