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.
