Solution Manual For
Financial Statement Analysis,
13th Edition
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
, Chapter 1
Introduction to
Financial Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the primary
responsibility for the development of generally accepted accounting principles.
Their role was substantially reduced in 1973 when the Financial Accounting
Standards Board was established. Their role was further reduced with the
establishment of the Public Company Accounting Oversight Board was
established in 2002.
b. The Financial Accounting Standards Board replaced the Accounting
Principles Board as the primary rule-making body for accounting standards.
It is an independent organization and includes members other than public
accountants.
c. The SEC has the authority to determine generally accepted accounting
principles and to regulate the accounting profession. The SEC has elected to
leave much of the determination of generally accepted accounting principles
to the private sector. The Financial Accounting Standards Board has played
the major role in establishing accounting standards since 1973. Regulation of
the accounting profession was substantially turned over to the Public
Company Accounting Oversight Board in 2002.
1- 2. Consistency is obtained through the application of the same accounting
principle from period to period. A change in principle requires statement
disclosure.
1- 3. The concept of historical cost determines the balance sheet valuation of land. The
realization concept requires that a transaction needs to occur for the profit to be
recognized.
1- 4. a. Entity e. Historical cost
b. Realization f. Historical cost
c. Materiality g. Disclosure
d. Conservatism
,1- 5. Entity concept
, 1- 6. Generally accepted accounting principles do not apply when a firm does not appear
to be a going concern. If the decision is made that this is not a going concern, then
the use of GAAP would not be appropriate.
1- 7. With the time period assumption, inaccuracies of accounting for the entity, short of its
complete life span, are accepted. The assumption is made that the entity can be
accounted for reasonably accurately for a particular period of time. In other words,
the decision is made to accept some inaccuracy because of incomplete information
about the future in exchange for more timely reporting. The statements are
considered to be meaningful because material inaccuracies are not acceptable.
1- 8. It is true that the only accurate way to account for the success or failure of an entity is
to accumulate all transactions from the opening of business until the business
eventually liquidates. But it is not necessary that the statements be completely
accurate in order for them to be meaningful.
1- 9. a. A year that ends when operations are at a low ebb for the year.
b. The accounting time period is ended on December 31.
c. A twelve-month accounting period that ends at the end of a month other than
December 31.
1-10. Money.
1-11. When money does not hold a stable value, the financial statements can lose much of
their significance. To the extent that money does not remain stable, it loses
usefulness as the standard for measuring financial transactions.
1-12. No. There is a problem with determining the index in order to adjust the statements.
The items that are included in the index must be representative. In addition, the
prices of items change because of various factors, such as quality, technology, and
inflation.
Yes. A reasonable adjustment to the statements can be made for inflation.
1-13. False. An arbitrary write-off of inventory cannot be justified under the conservatism
concept. The conservatism concept can only be applied where there are alternative
measurements and each of these alternative measurements has reasonable support.
1-14. Yes, inventory that has a market value below the historical cost should be written
down in order to recognize a loss. This is done based upon the concept of
conservatism. Losses that can be reasonably anticipated should be taken in order to
reflect the least favorable effect on net income of the current period.
Financial Statement Analysis,
13th Edition
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
, Chapter 1
Introduction to
Financial Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the primary
responsibility for the development of generally accepted accounting principles.
Their role was substantially reduced in 1973 when the Financial Accounting
Standards Board was established. Their role was further reduced with the
establishment of the Public Company Accounting Oversight Board was
established in 2002.
b. The Financial Accounting Standards Board replaced the Accounting
Principles Board as the primary rule-making body for accounting standards.
It is an independent organization and includes members other than public
accountants.
c. The SEC has the authority to determine generally accepted accounting
principles and to regulate the accounting profession. The SEC has elected to
leave much of the determination of generally accepted accounting principles
to the private sector. The Financial Accounting Standards Board has played
the major role in establishing accounting standards since 1973. Regulation of
the accounting profession was substantially turned over to the Public
Company Accounting Oversight Board in 2002.
1- 2. Consistency is obtained through the application of the same accounting
principle from period to period. A change in principle requires statement
disclosure.
1- 3. The concept of historical cost determines the balance sheet valuation of land. The
realization concept requires that a transaction needs to occur for the profit to be
recognized.
1- 4. a. Entity e. Historical cost
b. Realization f. Historical cost
c. Materiality g. Disclosure
d. Conservatism
,1- 5. Entity concept
, 1- 6. Generally accepted accounting principles do not apply when a firm does not appear
to be a going concern. If the decision is made that this is not a going concern, then
the use of GAAP would not be appropriate.
1- 7. With the time period assumption, inaccuracies of accounting for the entity, short of its
complete life span, are accepted. The assumption is made that the entity can be
accounted for reasonably accurately for a particular period of time. In other words,
the decision is made to accept some inaccuracy because of incomplete information
about the future in exchange for more timely reporting. The statements are
considered to be meaningful because material inaccuracies are not acceptable.
1- 8. It is true that the only accurate way to account for the success or failure of an entity is
to accumulate all transactions from the opening of business until the business
eventually liquidates. But it is not necessary that the statements be completely
accurate in order for them to be meaningful.
1- 9. a. A year that ends when operations are at a low ebb for the year.
b. The accounting time period is ended on December 31.
c. A twelve-month accounting period that ends at the end of a month other than
December 31.
1-10. Money.
1-11. When money does not hold a stable value, the financial statements can lose much of
their significance. To the extent that money does not remain stable, it loses
usefulness as the standard for measuring financial transactions.
1-12. No. There is a problem with determining the index in order to adjust the statements.
The items that are included in the index must be representative. In addition, the
prices of items change because of various factors, such as quality, technology, and
inflation.
Yes. A reasonable adjustment to the statements can be made for inflation.
1-13. False. An arbitrary write-off of inventory cannot be justified under the conservatism
concept. The conservatism concept can only be applied where there are alternative
measurements and each of these alternative measurements has reasonable support.
1-14. Yes, inventory that has a market value below the historical cost should be written
down in order to recognize a loss. This is done based upon the concept of
conservatism. Losses that can be reasonably anticipated should be taken in order to
reflect the least favorable effect on net income of the current period.
