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