Solution Manual for Financial Statement Analysis,
t t t t t
13th Edition by Charles H. Gibson,
t t t t t t
Verified Chapter's 1 - 13 | Complete
t t t t t t
, Chaptert1t IntroductionttotF
inancialtReporting
QUESTIONS
1- 1. a.
ThetAICPAtistantorganizationtoftCPAstthattpriorttot1973tacceptedtthetprimarytresp
onsibilitytfortthetdevelopmenttoftgenerallytacceptedtaccountingtprinciples.tTheirtrolet
wastsubstantiallytreducedtint1973twhentthetFinancialtAccountingtStandardstBoardtw
astestablished.t TheirtroletwastfurthertreducedtwithtthetestablishmenttoftthetPublictCo
mpanytAccountingtOversighttBoardtwastestablishedtint2002.
b. ThetFinancialtAccountingtStandardstBoardtreplacedtthetAccountingtPrinciplestB
oardtastthetprimarytrule-
makingtbodytfortaccountingtstandards.tIttistantindependenttorganizationtandtin
cludestmemberstothertthantpublictaccountants.
c. ThetSECthastthetauthorityttotdeterminetgenerallytacceptedtaccountingtprinciplestan
dttotregulatetthetaccountingtprofession.tThetSECthastelectedttotleavetmuchtoftthetde
terminationtoftgenerallytacceptedtaccountingtprinciplesttotthetprivatetsector.t ThetF
inancialtAccountingtStandardstBoardthastplayedtthetmajortroletintestablishingtacco
untingtstandardstsincet1973.t Regulationtoftthetaccountingtprofessiontwastsubstanti
allytturnedtoverttotthetPublictCompanytAccountingtOversighttBoardtint2002.
1-t2.
Consistencytistobtainedtthroughtthetapplicationtoftthetsametaccountingtprincipletfro
mtperiodttotperiod.t Atchangetintprincipletrequireststatementtdisclosure.
1-t3.
Thetconcepttofthistoricaltcosttdeterminestthetbalancetsheettvaluationtoftland.tThetrealizationt
concepttrequirestthattattransactiontneedsttotoccurtfortthetprofitttotbetrecognized.
1-t4. a.t Entity e.t Historicaltcost
b. Realization f.t Historicaltcost
c. Materiality g.t Disclosure
d. Conservatism
1-t5. Entitytconcept
,1-t6.
Generallytacceptedtaccountingtprinciplestdotnottapplytwhentatfirmtdoestnottappearttotb
etatgoingtconcern.t Iftthetdecisiontistmadetthattthististnottatgoingtconcern,tthentthetusetoftGA
APtwouldtnottbetappropriate.
1-t7.
Withtthettimetperiodtassumption,tinaccuraciestoftaccountingtfortthetentity,tshorttoftitstcomple
tetlifetspan,taretaccepted.tThetassumptiontistmadetthattthetentitytcantbetaccountedtfortreaso
nablytaccuratelytfortatparticulartperiodtofttime.t Intothertwords,tthetdecisiontistmadettotacc
epttsometinaccuracytbecausetoftincompletetinformationtabouttthetfuturetintexchangetfortmo
rettimelytreporting.t Thetstatementstaretconsideredttotbetmeaningfultbecausetmaterialtinac
curaciestaretnottacceptable.
1- 8.t t Ittisttruetthattthetonlytaccuratetwayttotaccounttfortthetsuccesstortfailuretoftantentitytisttotaccumul
atetallttransactionstfromtthetopeningtoftbusinesstuntiltthetbusinessteventuallytliquidates.t But
tittistnottnecessarytthattthetstatementstbetcompletelytaccuratetintordertfortthemttotbetmeani
ngful.
1- 9. a. Atyeartthattendstwhentoperationstaretattatlowtebbtfortthetyear.
b. ThetaccountingttimetperiodtistendedtontDecembert31.
c. Attwelve-
monthtaccountingtperiodtthattendstattthetendtoftatmonthtothertthantDecembert31.
1-10. Money.
1-
11.t t Whentmoneytdoestnottholdtatstabletvalue,tthetfinancialtstatementstcantlosetmuchtoftt
heirtsignificance.t Totthetextenttthattmoneytdoestnottremaintstable,tittlosestusefulnesstastthet
standardtfortmeasuringtfinancialttransactions.
1-12.
No.t Theretistatproblemtwithtdeterminingtthetindextintorderttotadjusttthetstatements.t Thetite
mstthattaretincludedtintthetindextmusttbetrepresentative.tIntaddition,tthetpricestoftitemstcha
ngetbecausetoftvarioustfactors,tsuchtastquality,ttechnology,tandtinflation.
Yes.tAtreasonabletadjustmentttotthetstatementstcantbetmadetfortinflation.
1-13. False.t Antarbitrarytwrite-
offtoftinventorytcannottbetjustifiedtundertthetconservatismtconcept.t Thetconservatismtconc
epttcantonlytbetappliedtwherettheretaretalternativetmeasurementstandteachtoftthesetalter
nativetmeasurementsthastreasonabletsupport.
1-14.
Yes,tinventorytthatthastatmarkettvaluetbelowtthethistoricaltcosttshouldtbetwrittentdowntint
orderttotrecognizetatloss.t Thististdonetbasedtupontthetconcepttoftconservatism.t Lossesttha
ttcantbetreasonablytanticipatedtshouldtbettakentintorderttotreflecttthetleasttfavorableteff
ecttontnettincometoftthetcurrenttperiod.
, 1-15. Endtoftproduction
Thetrealizationtoftrevenuetattthetcompletiontoftthetproductiontprocesstistacceptabletwhentth
etpricetoftthetitemtistknowntandttheretistatreadytmarket.
Receipttoftcash
Thistmethodtshouldtonlytbetusedtwhentthetprospectstoftcollectiontaretespeciallytdoubtfultattth
ettimetoftsale.
Duringtproduction
Thistmethodtistallowedtfortlong-
termtconstructiontprojectstbecausetrecognizingtrevenuetontlong-
termtconstructiontprojectstastworktprogressesttendsttotgivetatfairertpicturetoftthetresultstfor
tatgiventperiodtintcomparisontwiththavingtthetentiretrevenuetrealizedtintonetperiodtofttime
.
1-16.
Ittistdifficultttotapplytthetmatchingtconcepttwhenttheretistnotdirecttconnectiontbetweentthetc
osttandtrevenue.t Undertthesetcircumstances,taccountantstoftentchargetofftthetcosttintthetpe
riodtincurredtintorderttotbetconservative.
1-17.
Iftthetentitytcantjustifytthetusetoftantalternativetaccountingtmethodtontthetbasistthattittistr
ational,tthentthetchangetcantbetmade.
1-18.
Thetaccountingtreportstmusttdisclosetalltfactstthattmaytinfluencetthetjudgmenttoftantinforme
dtreader.t Usuallytthististatjudgmenttdecisiontfortthetaccountantttotmake.t Becausetoftthetco
mplexitytoftmanytbusinessestandtthetincreasedtexpectationstoftthetpublic,tthetfulltdisclosur
etconceptthastbecometonetoftthetmosttdifficulttconceptstfortthetaccountantttotapply.
1-19.
Theretistatpreferencetfortthetusetoftobjectivitytintthetpreparationtoftfinancialtstatements,t
buttfinancialtstatementstcannottbetcompletelytpreparedtbasedtupontobjectivetdata;testi
matestmusttbetmadetintmanytsituations.
1-20.
Thististattruetstatement.t Thetconcepttoftmaterialitytallowstthetaccountantttothandletimmate
rialtitemstintthetmostteconomicaltandtexpedienttmannertpossible.
1-21.
Sometindustrytpracticestleadttotaccountingtreportstthattdotnottconformttotgenerallytaccept
edtaccountingtprinciples.t Thesetreportstaretconsideredttotbetacceptable,tbuttthetaccountin
gtprofessiontistmakingtanteffortttoteliminatetparticulartindustrytpracticestthattdotnottconfor
mttotthetnormaltgenerallytacceptedtaccountingtprinciples.
1-22.
Eventstthattfalltoutsidetoftthetfinancialttransactionstoftthetentitytaretnottrecorded.t A
t t t t t
13th Edition by Charles H. Gibson,
t t t t t t
Verified Chapter's 1 - 13 | Complete
t t t t t t
, Chaptert1t IntroductionttotF
inancialtReporting
QUESTIONS
1- 1. a.
ThetAICPAtistantorganizationtoftCPAstthattpriorttot1973tacceptedtthetprimarytresp
onsibilitytfortthetdevelopmenttoftgenerallytacceptedtaccountingtprinciples.tTheirtrolet
wastsubstantiallytreducedtint1973twhentthetFinancialtAccountingtStandardstBoardtw
astestablished.t TheirtroletwastfurthertreducedtwithtthetestablishmenttoftthetPublictCo
mpanytAccountingtOversighttBoardtwastestablishedtint2002.
b. ThetFinancialtAccountingtStandardstBoardtreplacedtthetAccountingtPrinciplestB
oardtastthetprimarytrule-
makingtbodytfortaccountingtstandards.tIttistantindependenttorganizationtandtin
cludestmemberstothertthantpublictaccountants.
c. ThetSECthastthetauthorityttotdeterminetgenerallytacceptedtaccountingtprinciplestan
dttotregulatetthetaccountingtprofession.tThetSECthastelectedttotleavetmuchtoftthetde
terminationtoftgenerallytacceptedtaccountingtprinciplesttotthetprivatetsector.t ThetF
inancialtAccountingtStandardstBoardthastplayedtthetmajortroletintestablishingtacco
untingtstandardstsincet1973.t Regulationtoftthetaccountingtprofessiontwastsubstanti
allytturnedtoverttotthetPublictCompanytAccountingtOversighttBoardtint2002.
1-t2.
Consistencytistobtainedtthroughtthetapplicationtoftthetsametaccountingtprincipletfro
mtperiodttotperiod.t Atchangetintprincipletrequireststatementtdisclosure.
1-t3.
Thetconcepttofthistoricaltcosttdeterminestthetbalancetsheettvaluationtoftland.tThetrealizationt
concepttrequirestthattattransactiontneedsttotoccurtfortthetprofitttotbetrecognized.
1-t4. a.t Entity e.t Historicaltcost
b. Realization f.t Historicaltcost
c. Materiality g.t Disclosure
d. Conservatism
1-t5. Entitytconcept
,1-t6.
Generallytacceptedtaccountingtprinciplestdotnottapplytwhentatfirmtdoestnottappearttotb
etatgoingtconcern.t Iftthetdecisiontistmadetthattthististnottatgoingtconcern,tthentthetusetoftGA
APtwouldtnottbetappropriate.
1-t7.
Withtthettimetperiodtassumption,tinaccuraciestoftaccountingtfortthetentity,tshorttoftitstcomple
tetlifetspan,taretaccepted.tThetassumptiontistmadetthattthetentitytcantbetaccountedtfortreaso
nablytaccuratelytfortatparticulartperiodtofttime.t Intothertwords,tthetdecisiontistmadettotacc
epttsometinaccuracytbecausetoftincompletetinformationtabouttthetfuturetintexchangetfortmo
rettimelytreporting.t Thetstatementstaretconsideredttotbetmeaningfultbecausetmaterialtinac
curaciestaretnottacceptable.
1- 8.t t Ittisttruetthattthetonlytaccuratetwayttotaccounttfortthetsuccesstortfailuretoftantentitytisttotaccumul
atetallttransactionstfromtthetopeningtoftbusinesstuntiltthetbusinessteventuallytliquidates.t But
tittistnottnecessarytthattthetstatementstbetcompletelytaccuratetintordertfortthemttotbetmeani
ngful.
1- 9. a. Atyeartthattendstwhentoperationstaretattatlowtebbtfortthetyear.
b. ThetaccountingttimetperiodtistendedtontDecembert31.
c. Attwelve-
monthtaccountingtperiodtthattendstattthetendtoftatmonthtothertthantDecembert31.
1-10. Money.
1-
11.t t Whentmoneytdoestnottholdtatstabletvalue,tthetfinancialtstatementstcantlosetmuchtoftt
heirtsignificance.t Totthetextenttthattmoneytdoestnottremaintstable,tittlosestusefulnesstastthet
standardtfortmeasuringtfinancialttransactions.
1-12.
No.t Theretistatproblemtwithtdeterminingtthetindextintorderttotadjusttthetstatements.t Thetite
mstthattaretincludedtintthetindextmusttbetrepresentative.tIntaddition,tthetpricestoftitemstcha
ngetbecausetoftvarioustfactors,tsuchtastquality,ttechnology,tandtinflation.
Yes.tAtreasonabletadjustmentttotthetstatementstcantbetmadetfortinflation.
1-13. False.t Antarbitrarytwrite-
offtoftinventorytcannottbetjustifiedtundertthetconservatismtconcept.t Thetconservatismtconc
epttcantonlytbetappliedtwherettheretaretalternativetmeasurementstandteachtoftthesetalter
nativetmeasurementsthastreasonabletsupport.
1-14.
Yes,tinventorytthatthastatmarkettvaluetbelowtthethistoricaltcosttshouldtbetwrittentdowntint
orderttotrecognizetatloss.t Thististdonetbasedtupontthetconcepttoftconservatism.t Lossesttha
ttcantbetreasonablytanticipatedtshouldtbettakentintorderttotreflecttthetleasttfavorableteff
ecttontnettincometoftthetcurrenttperiod.
, 1-15. Endtoftproduction
Thetrealizationtoftrevenuetattthetcompletiontoftthetproductiontprocesstistacceptabletwhentth
etpricetoftthetitemtistknowntandttheretistatreadytmarket.
Receipttoftcash
Thistmethodtshouldtonlytbetusedtwhentthetprospectstoftcollectiontaretespeciallytdoubtfultattth
ettimetoftsale.
Duringtproduction
Thistmethodtistallowedtfortlong-
termtconstructiontprojectstbecausetrecognizingtrevenuetontlong-
termtconstructiontprojectstastworktprogressesttendsttotgivetatfairertpicturetoftthetresultstfor
tatgiventperiodtintcomparisontwiththavingtthetentiretrevenuetrealizedtintonetperiodtofttime
.
1-16.
Ittistdifficultttotapplytthetmatchingtconcepttwhenttheretistnotdirecttconnectiontbetweentthetc
osttandtrevenue.t Undertthesetcircumstances,taccountantstoftentchargetofftthetcosttintthetpe
riodtincurredtintorderttotbetconservative.
1-17.
Iftthetentitytcantjustifytthetusetoftantalternativetaccountingtmethodtontthetbasistthattittistr
ational,tthentthetchangetcantbetmade.
1-18.
Thetaccountingtreportstmusttdisclosetalltfactstthattmaytinfluencetthetjudgmenttoftantinforme
dtreader.t Usuallytthististatjudgmenttdecisiontfortthetaccountantttotmake.t Becausetoftthetco
mplexitytoftmanytbusinessestandtthetincreasedtexpectationstoftthetpublic,tthetfulltdisclosur
etconceptthastbecometonetoftthetmosttdifficulttconceptstfortthetaccountantttotapply.
1-19.
Theretistatpreferencetfortthetusetoftobjectivitytintthetpreparationtoftfinancialtstatements,t
buttfinancialtstatementstcannottbetcompletelytpreparedtbasedtupontobjectivetdata;testi
matestmusttbetmadetintmanytsituations.
1-20.
Thististattruetstatement.t Thetconcepttoftmaterialitytallowstthetaccountantttothandletimmate
rialtitemstintthetmostteconomicaltandtexpedienttmannertpossible.
1-21.
Sometindustrytpracticestleadttotaccountingtreportstthattdotnottconformttotgenerallytaccept
edtaccountingtprinciples.t Thesetreportstaretconsideredttotbetacceptable,tbuttthetaccountin
gtprofessiontistmakingtanteffortttoteliminatetparticulartindustrytpracticestthattdotnottconfor
mttotthetnormaltgenerallytacceptedtaccountingtprinciples.
1-22.
Eventstthattfalltoutsidetoftthetfinancialttransactionstoftthetentitytaretnottrecorded.t A
