Solution Manual For Financial Statement Analysis,
13th Edition
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
, Chapterj1j Introductionj
tojFinancialjReporting
QUESTIONS
1- 1. a.
ThejAICPAjisjanjorganizationjofjCPAsjthatjpriorjtoj1973jacceptedjthejprima
ryjresponsibilityjforjthejdevelopmentjofjgenerallyjacceptedjaccountingjprinci
ples.jTheirjrolejwasjsubstantiallyjreducedjinj1973jwhenjthejFinancialjAccoun
tingjStandardsjBoardjwasjestablished.j Theirjrolejwasjfurtherjreducedjwithjth
ejestablishmentjofjthejPublicjCompanyjAccountingjOversightjBoardjwasjest
ablishedjinj2002.
b. ThejFinancialjAccountingjStandardsjBoardjreplacedjthejAccountingjPri
nciplesjBoardjasjthejprimaryjrule-
makingjbodyjforjaccountingjstandards.jItjisjanjindependentjorganizatio
njandjincludesjmembersjotherjthanjpublicjaccountants.
c. ThejSECjhasjthejauthorityjtojdeterminejgenerallyjacceptedjaccountingjprin
ciplesjandjtojregulatejthejaccountingjprofession.jThejSECjhasjelectedjtojle
avejmuchjofjthejdeterminationjofjgenerallyjacceptedjaccountingjprinciplesj
tojthejprivatejsector.j ThejFinancialjAccountingjStandardsjBoardjhasjplaye
djthejmajorjrolejinjestablishingjaccountingjstandardsjsincej1973.j Regulati
onjofjthejaccountingjprofessionjwasjsubstantiallyjturnedjoverjtojthejPublicj
CompanyjAccountingjOversightjBoardjinj2002.
1-j2.
Consistencyjisjobtainedjthroughjthejapplicationjofjthejsamejaccountingjprin
ciplejfromjperiodjtojperiod.j Ajchangejinjprinciplejrequiresjstatementjdisclosu
re.
1-j3.
Thejconceptjofjhistoricaljcostjdeterminesjthejbalancejsheetjvaluationjofjland.jThejr
ealizationjconceptjrequiresjthatjajtransactionjneedsjtojoccurjforjthejprofitjtojbejreco
gnized.
1-j4. a.j Entity e.j Historicaljcost
b. Realization f.j Historicaljcost
c. Materiality g.j Disclosure
d. Conservatism
1-j5. Entityjconcept
,1-j6.
Generallyjacceptedjaccountingjprinciplesjdojnotjapplyjwhenjajfirmjdoesjnotjapp
earjtojbejajgoingjconcern.j Ifjthejdecisionjisjmadejthatjthisjisjnotjajgoingjconcern,jt
henjthejusejofjGAAPjwouldjnotjbejappropriate.
1-j7.
Withjthejtimejperiodjassumption,jinaccuraciesjofjaccountingjforjthejentity,jshortjofji
tsjcompletejlifejspan,jarejaccepted.jThejassumptionjisjmadejthatjthejentityjcanjbeja
ccountedjforjreasonablyjaccuratelyjforjajparticularjperiodjofjtime.j Injotherjwords,jt
hejdecisionjisjmadejtojacceptjsomejinaccuracyjbecausejofjincompletejinformation
jaboutjthejfuturejinjexchangejforjmorejtimelyjreporting.j Thejstatementsjarejconsid
eredjtojbejmeaningfuljbecausejmaterialjinaccuraciesjarejnotjacceptable.
1- 8.j j Itjisjtruejthatjthejonlyjaccuratejwayjtojaccountjforjthejsuccessjorjfailurejofjanjentityjisjtoj
accumulatejalljtransactionsjfromjthejopeningjofjbusinessjuntiljthejbusinessjevent
uallyjliquidates.j Butjitjisjnotjnecessaryjthatjthejstatementsjbejcompletelyjaccurate
jinjorderjforjthemjtojbejmeaningful.
1- 9. a. Ajyearjthatjendsjwhenjoperationsjarejatjajlowjebbjforjthejyear.
b. ThejaccountingjtimejperiodjisjendedjonjDecemberj31.
c. Ajtwelve-
monthjaccountingjperiodjthatjendsjatjthejendjofjajmonthjotherjthanjDecemb
erj31.
1-10. Money.
1-
11.j j Whenjmoneyjdoesjnotjholdjajstablejvalue,jthejfinancialjstatementsjcanjlosej
muchjofjtheirjsignificance.j Tojthejextentjthatjmoneyjdoesjnotjremainjstable,jitjlose
sjusefulnessjasjthejstandardjforjmeasuringjfinancialjtransactions.
1-12.
No.j Therejisjajproblemjwithjdeterminingjthejindexjinjorderjtojadjustjthejstatement
s.j Thejitemsjthatjarejincludedjinjthejindexjmustjbejrepresentative.jInjaddition,jthej
pricesjofjitemsjchangejbecausejofjvariousjfactors,jsuchjasjquality,jtechnology,jan
djinflation.
Yes.jAjreasonablejadjustmentjtojthejstatementsjcanjbejmadejforjinflation.
1-13. False.j Anjarbitraryjwrite-
offjofjinventoryjcannotjbejjustifiedjunderjthejconservatismjconcept.j Thejconserv
atismjconceptjcanjonlyjbejappliedjwherejtherejarejalternativejmeasurementsjandj
eachjofjthesejalternativejmeasurementsjhasjreasonablejsupport.
1-14.
, Yes,jinventoryjthatjhasjajmarketjvaluejbelowjthejhistoricaljcostjshouldjbejwrittenj
downjinjorderjtojrecognizejajloss.j Thisjisjdonejbasedjuponjthejconceptjofjconser
vatism.j Lossesjthatjcanjbejreasonablyjanticipatedjshouldjbejtakenjinjorderjtojref
lectjthejleastjfavorablejeffectjonjnetjincomejofjthejcurrentjperiod.
13th Edition
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
, Chapterj1j Introductionj
tojFinancialjReporting
QUESTIONS
1- 1. a.
ThejAICPAjisjanjorganizationjofjCPAsjthatjpriorjtoj1973jacceptedjthejprima
ryjresponsibilityjforjthejdevelopmentjofjgenerallyjacceptedjaccountingjprinci
ples.jTheirjrolejwasjsubstantiallyjreducedjinj1973jwhenjthejFinancialjAccoun
tingjStandardsjBoardjwasjestablished.j Theirjrolejwasjfurtherjreducedjwithjth
ejestablishmentjofjthejPublicjCompanyjAccountingjOversightjBoardjwasjest
ablishedjinj2002.
b. ThejFinancialjAccountingjStandardsjBoardjreplacedjthejAccountingjPri
nciplesjBoardjasjthejprimaryjrule-
makingjbodyjforjaccountingjstandards.jItjisjanjindependentjorganizatio
njandjincludesjmembersjotherjthanjpublicjaccountants.
c. ThejSECjhasjthejauthorityjtojdeterminejgenerallyjacceptedjaccountingjprin
ciplesjandjtojregulatejthejaccountingjprofession.jThejSECjhasjelectedjtojle
avejmuchjofjthejdeterminationjofjgenerallyjacceptedjaccountingjprinciplesj
tojthejprivatejsector.j ThejFinancialjAccountingjStandardsjBoardjhasjplaye
djthejmajorjrolejinjestablishingjaccountingjstandardsjsincej1973.j Regulati
onjofjthejaccountingjprofessionjwasjsubstantiallyjturnedjoverjtojthejPublicj
CompanyjAccountingjOversightjBoardjinj2002.
1-j2.
Consistencyjisjobtainedjthroughjthejapplicationjofjthejsamejaccountingjprin
ciplejfromjperiodjtojperiod.j Ajchangejinjprinciplejrequiresjstatementjdisclosu
re.
1-j3.
Thejconceptjofjhistoricaljcostjdeterminesjthejbalancejsheetjvaluationjofjland.jThejr
ealizationjconceptjrequiresjthatjajtransactionjneedsjtojoccurjforjthejprofitjtojbejreco
gnized.
1-j4. a.j Entity e.j Historicaljcost
b. Realization f.j Historicaljcost
c. Materiality g.j Disclosure
d. Conservatism
1-j5. Entityjconcept
,1-j6.
Generallyjacceptedjaccountingjprinciplesjdojnotjapplyjwhenjajfirmjdoesjnotjapp
earjtojbejajgoingjconcern.j Ifjthejdecisionjisjmadejthatjthisjisjnotjajgoingjconcern,jt
henjthejusejofjGAAPjwouldjnotjbejappropriate.
1-j7.
Withjthejtimejperiodjassumption,jinaccuraciesjofjaccountingjforjthejentity,jshortjofji
tsjcompletejlifejspan,jarejaccepted.jThejassumptionjisjmadejthatjthejentityjcanjbeja
ccountedjforjreasonablyjaccuratelyjforjajparticularjperiodjofjtime.j Injotherjwords,jt
hejdecisionjisjmadejtojacceptjsomejinaccuracyjbecausejofjincompletejinformation
jaboutjthejfuturejinjexchangejforjmorejtimelyjreporting.j Thejstatementsjarejconsid
eredjtojbejmeaningfuljbecausejmaterialjinaccuraciesjarejnotjacceptable.
1- 8.j j Itjisjtruejthatjthejonlyjaccuratejwayjtojaccountjforjthejsuccessjorjfailurejofjanjentityjisjtoj
accumulatejalljtransactionsjfromjthejopeningjofjbusinessjuntiljthejbusinessjevent
uallyjliquidates.j Butjitjisjnotjnecessaryjthatjthejstatementsjbejcompletelyjaccurate
jinjorderjforjthemjtojbejmeaningful.
1- 9. a. Ajyearjthatjendsjwhenjoperationsjarejatjajlowjebbjforjthejyear.
b. ThejaccountingjtimejperiodjisjendedjonjDecemberj31.
c. Ajtwelve-
monthjaccountingjperiodjthatjendsjatjthejendjofjajmonthjotherjthanjDecemb
erj31.
1-10. Money.
1-
11.j j Whenjmoneyjdoesjnotjholdjajstablejvalue,jthejfinancialjstatementsjcanjlosej
muchjofjtheirjsignificance.j Tojthejextentjthatjmoneyjdoesjnotjremainjstable,jitjlose
sjusefulnessjasjthejstandardjforjmeasuringjfinancialjtransactions.
1-12.
No.j Therejisjajproblemjwithjdeterminingjthejindexjinjorderjtojadjustjthejstatement
s.j Thejitemsjthatjarejincludedjinjthejindexjmustjbejrepresentative.jInjaddition,jthej
pricesjofjitemsjchangejbecausejofjvariousjfactors,jsuchjasjquality,jtechnology,jan
djinflation.
Yes.jAjreasonablejadjustmentjtojthejstatementsjcanjbejmadejforjinflation.
1-13. False.j Anjarbitraryjwrite-
offjofjinventoryjcannotjbejjustifiedjunderjthejconservatismjconcept.j Thejconserv
atismjconceptjcanjonlyjbejappliedjwherejtherejarejalternativejmeasurementsjandj
eachjofjthesejalternativejmeasurementsjhasjreasonablejsupport.
1-14.
, Yes,jinventoryjthatjhasjajmarketjvaluejbelowjthejhistoricaljcostjshouldjbejwrittenj
downjinjorderjtojrecognizejajloss.j Thisjisjdonejbasedjuponjthejconceptjofjconser
vatism.j Lossesjthatjcanjbejreasonablyjanticipatedjshouldjbejtakenjinjorderjtojref
lectjthejleastjfavorablejeffectjonjnetjincomejofjthejcurrentjperiod.
