Download Financial Statement Analysis 13th Edition Solution Manual by Charles H. Gibson | PDF Guide

Chapterj1j Introduction
jtojFinancialjReporting




QUESTIONS

1- 1. a.
ThejAICPAjisjanjorganizationjofjCPAsjthatjpriorjtoj1973jacceptedjthejprim
aryjresponsibilityjforjthejdevelopmentjofjgenerallyjacceptedjaccountingjprin
ciples.jTheirjrolejwasjsubstantiallyjreducedjinj1973jwhenjthejFinancialjAcco
untingjStandardsjBoardjwasjestablished.j Theirjrolejwasjfurtherjreducedjwit
hjthejestablishmentjofjthejPublicjCompanyjAccountingjOversightjBoardjwa
sjestablishedjinj2002.

b. ThejFinancialjAccountingjStandardsjBoardjreplacedjthejAccountingjPr
inciplesjBoardjasjthejprimaryjrule-
makingjbodyjforjaccountingjstandards.jItjisjanjindependentjorganizatio
njandjincludesjmembersjotherjthanjpublicjaccountants.

c. ThejSECjhasjthejauthorityjtojdeterminejgenerallyjacceptedjaccountingjpri
nciplesjandjtojregulatejthejaccountingjprofession.jThejSECjhasjelectedjtoj
leavejmuchjofjthejdeterminationjofjgenerallyjacceptedjaccountingjprincipl
esjtojthejprivatejsector.j ThejFinancialjAccountingjStandardsjBoardjhasjpl
ayedjthejmajorjrolejinjestablishingjaccountingjstandardsjsincej1973.j Reg
ulationjofjthejaccountingjprofessionjwasjsubstantiallyjturnedjoverjtojthejP
ublicjCompanyjAccountingjOversightjBoardjinj2002.

1-j2.
Consistencyjisjobtainedjthroughjthejapplicationjofjthejsamejaccountingjpri
nciplejfromjperiodjtojperiod.j Ajchangejinjprinciplejrequiresjstatementjdisclo
sure.

1-j3.
Thejconceptjofjhistoricaljcostjdeterminesjthejbalancejsheetjvaluationjofjland.jThe
jrealizationjconceptjrequiresjthatjajtransactionjneedsjtojoccurjforjthejprofitjtojbejre
cognized.

1-j4. a.j Entity e.j Historicaljcost

b. Realization f.j Historicaljcost

c. Materiality g.j Disclosure

d. Conservatism

1-j5. Entityjconcept

1
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.

,1-j6.
Generallyjacceptedjaccountingjprinciplesjdojnotjapplyjwhenjajfirmjdoesjnotjap
pearjtojbejajgoingjconcern.j Ifjthejdecisionjisjmadejthatjthisjisjnotjajgoingjconcern
,jthenjthejusejofjGAAPjwouldjnotjbejappropriate.

1-j7.
Withjthejtimejperiodjassumption,jinaccuraciesjofjaccountingjforjthejentity,jshortj
ofjitsjcompletejlifejspan,jarejaccepted.jThejassumptionjisjmadejthatjthejentityjcanj
bejaccountedjforjreasonablyjaccuratelyjforjajparticularjperiodjofjtime.j Injotherjwo
rds,jthejdecisionjisjmadejtojacceptjsomejinaccuracyjbecausejofjincompletejinfor
mationjaboutjthejfuturejinjexchangejforjmorejtimelyjreporting.j Thejstatementsjar
ejconsideredjtojbejmeaningfuljbecausejmaterialjinaccuraciesjarejnotjacceptable.

1- 8.j j Itjisjtruejthatjthejonlyjaccuratejwayjtojaccountjforjthejsuccessjorjfailurejofjanjentityjisj
tojaccumulatejalljtransactionsjfromjthejopeningjofjbusinessjuntiljthejbusinessjev
entuallyjliquidates.j Butjitjisjnotjnecessaryjthatjthejstatementsjbejcompletelyjacc
uratejinjorderjforjthemjtojbejmeaningful.

1- 9. a. Ajyearjthatjendsjwhenjoperationsjarejatjajlowjebbjforjthejyear.

b. ThejaccountingjtimejperiodjisjendedjonjDecemberj31.

c. Ajtwelve-
monthjaccountingjperiodjthatjendsjatjthejendjofjajmonthjotherjthanjDecem
berj31.
1-10. Money.

1-
11.j j Whenjmoneyjdoesjnotjholdjajstablejvalue,jthejfinancialjstatementsjcanjlos
ejmuchjofjtheirjsignificance.j Tojthejextentjthatjmoneyjdoesjnotjremainjstable,jitjl
osesjusefulnessjasjthejstandardjforjmeasuringjfinancialjtransactions.

1-12.
No.j Therejisjajproblemjwithjdeterminingjthejindexjinjorderjtojadjustjthejstateme
nts.j Thejitemsjthatjarejincludedjinjthejindexjmustjbejrepresentative.jInjaddition,jt
hejpricesjofjitemsjchangejbecausejofjvariousjfactors,jsuchjasjquality,jtechnolog
y,jandjinflation.

Yes.jAjreasonablejadjustmentjtojthejstatementsjcanjbejmadejforjinflation.

1-13. False.j Anjarbitraryjwrite-
offjofjinventoryjcannotjbejjustifiedjunderjthejconservatismjconcept.j Thejconserv
atismjconceptjcanjonlyjbejappliedjwherejtherejarejalternativejmeasurementsjan
djeachjofjthesejalternativejmeasurementsjhasjreasonablejsupport.

1-14.
2
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.

, Yes,jinventoryjthatjhasjajmarketjvaluejbelowjthejhistoricaljcostjshouldjbejwritt
enjdownjinjorderjtojrecognizejajloss.j Thisjisjdonejbasedjuponjthejconceptjofjco
nservatism.j Lossesjthatjcanjbejreasonablyjanticipatedjshouldjbejtakenjinjorde
rjtojreflectjthejleastjfavorablejeffectjonjnetjincomejofjthejcurrentjperiod.




3
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.

, 1-15. Endjofjproduction

Thejrealizationjofjrevenuejatjthejcompletionjofjthejproductionjprocessjisjacceptabl
ejwhenjthejpricejofjthejitemjisjknownjandjtherejisjajreadyjmarket.

Receiptjofjcash

Thisjmethodjshouldjonlyjbejusedjwhenjthejprospectsjofjcollectionjarejespeciallyj
doubtfuljatjthejtimejofjsale.

Duringjproduction

Thisjmethodjisjallowedjforjlong-
termjconstructionjprojectsjbecausejrecognizingjrevenuejonjlong-
termjconstructionjprojectsjasjworkjprogressesjtendsjtojgivejajfairerjpicturejofjthe
jresultsjforjajgivenjperiodjinjcomparisonjwithjhavingjthejentirejrevenuejrealizedji
njonejperiodjofjtime.

1-16.
Itjisjdifficultjtojapplyjthejmatchingjconceptjwhenjtherejisjnojdirectjconnectionjbet
weenjthejcostjandjrevenue.j Underjthesejcircumstances,jaccountantsjoftenjchar
gejoffjthejcostjinjthejperiodjincurredjinjorderjtojbejconservative.

1-17.
Ifjthejentityjcanjjustifyjthejusejofjanjalternativejaccountingjmethodjonjthejbas
isjthatjitjisjrational,jthenjthejchangejcanjbejmade.

1-18.
Thejaccountingjreportsjmustjdisclosejalljfactsjthatjmayjinfluencejthejjudgmentjo
fjanjinformedjreader.j Usuallyjthisjisjajjudgmentjdecisionjforjthejaccountantjtojma
ke.j Becausejofjthejcomplexityjofjmanyjbusinessesjandjthejincreasedjexpectatio
nsjofjthejpublic,jthejfulljdisclosurejconceptjhasjbecomejonejofjthejmostjdifficultjc
onceptsjforjthejaccountantjtojapply.

1-19.
Therejisjajpreferencejforjthejusejofjobjectivityjinjthejpreparationjofjfinancialjstat
ements,jbutjfinancialjstatementsjcannotjbejcompletelyjpreparedjbasedjuponjo
bjectivejdata;jestimatesjmustjbejmadejinjmanyjsituations.

1-20.
Thisjisjajtruejstatement.j Thejconceptjofjmaterialityjallowsjthejaccountantjtojha
ndlejimmaterialjitemsjinjthejmostjeconomicaljandjexpedientjmannerjpossible.

1-21.
Somejindustryjpracticesjleadjtojaccountingjreportsjthatjdojnotjconformjtojgenera
llyjacceptedjaccountingjprinciples.j Thesejreportsjarejconsideredjtojbejacceptabl
e,jbutjthejaccountingjprofessionjisjmakingjanjeffortjtojeliminatejparticularjindustry
4
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.