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