Solution Manual for Financial Statement Analysis, 13th Edition

Solution Manual For Financial Statement

Analysis,

13th Edition
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete

, Chapter 1 Introductio li l i



n to Financial Reporting
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QUESTIONS

1- 1. a.
The AICPA is an organization of CPAs that prior to 1973 accepted the prim
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ary responsibility for the development of generally accepted accounting prin
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ciples. Their role was substantially reduced in 1973 when the Financial Acco
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unting Standards Board was established. Their role was further reduced wit
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h the establishment of the Public Company Accounting Oversight Board was
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established in 2002.
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b. The Financial Accounting Standards Board replaced the Accounting Pri
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nciples Board as the primary rule- li li li li li



making body for accounting standards. It is an independent organizatio li li li li li li li li li



n and includes members other than public accountants.
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c. The SEC has the authority to determine generally accepted accounting prin
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ciples and to regulate the accounting profession. The SEC has elected to le
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ave much of the determination of generally accepted accounting principles
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to the private sector. The Financial Accounting Standards Board has play
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ed the major role in establishing accounting standards since 1973. Regula
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tion of the accounting profession was substantially turned over to the Publi
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c Company Accounting Oversight Board in 2002.
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1- 2.
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Consistency is obtained through the application of the same accounting prin li li li li li li li li li li



ciple from period to period. A change in principle requires statement disclos
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ure.

1- 3.
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The concept of historical cost determines the balance sheet valuation of land. The r
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ealization concept requires that a transaction needs to occur for the profit to be reco
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gnized.

1- 4.
li a. Entity
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b. Realization f. Historical cost
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c. Materiality g. Disclosure l i




d. Conservatism

1- 5.
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,1- 6.
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Generally accepted accounting principles do not apply when a firm does not app li li li li li li li li li li li li



ear to be a going concern. If the decision is made that this is not a going concern, t
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hen the use of GAAP would not be appropriate.
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1- 7.
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With the time period assumption, inaccuracies of accounting for the entity, short of
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its complete life span, are accepted. The assumption is made that the entity can be
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accounted for reasonably accurately for a particular period of time. In other word li li li li li li li li li l i li li



s, the decision is made to accept some inaccuracy because of incomplete informat
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ion about the future in exchange for more timely reporting. The statements are co
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nsidered to be meaningful because material inaccuracies are not acceptable. li li li li li li li li li




1- 8. l i l i It is true that the only accurate way to account for the success or failure of an entity is
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lito accumulate all transactions from the opening of business until the business ev
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entually liquidates. But it is not necessary that the statements be completely accu li l i li li li li li li li li li li



rate in order for them to be meaningful.
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1- 9. a. A year that ends when operations are at a low ebb for the year.
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b. The accounting time period is ended on December 31.li li li li li li li li




c. A twelve- li



month accounting period that ends at the end of a month other than Decemb li li li li li li li li li li li li li



er 31. li




1-10. Money.

1-
11. When money does not hold a stable value, the financial statements can lo
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se much of their significance. To the extent that money does not remain stable, it l
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oses usefulness as the standard for measuring financial transactions.
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1-12.
No. There is a problem with determining the index in order to adjust the statemen
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ts. The items that are included in the index must be representative. In addition, th
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e prices of items change because of various factors, such as quality, technology,
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and inflation. li




Yes. A reasonable adjustment to the statements can be made for inflation.
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1-13. False. An arbitrary write- l i li li



off of inventory cannot be justified under the conservatism concept. The conserv
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atism concept can only be applied where there are alternative measurements an
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d each of these alternative measurements has reasonable support.
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1-14.

, Yes, inventory that has a market value below the historical cost should be writte
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n down in order to recognize a loss. This is done based upon the concept of con
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servatism. Losses that can be reasonably anticipated should be taken in order t
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o reflect the least favorable effect on net income of the current period.
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