FINANCIAL REPORTING AND ANALYSIS, 13TH EDITION BY GIB

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,Chapter1
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Introduction to Financial Reporting j j j




QUESTIONS


1- 1.j a. The AICPA is an organization of CPAs that prior to 1973 accepted the
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primary responsibility for the development of generally accepted
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accountingprinciples.Their role wassubstantiallyreduced in1973when the
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Financial Accounting Standards Board was established. Their role was
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further reduced with the establishment of the Public Company Accounting
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Oversight Board was established in 2002.
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b. TheFinancial Accounting StandardsBoardreplacedtheAccounting Principles
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Board as the primary rule-making body for accounting standards. It is an
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independent organization and includes members other than public
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accountants.
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c. The SEChastheauthoritytodetermine generallyaccepted accounting
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principles and to regulate the accounting profession. The SEC has elected
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to leave much of the determination of generally accepted accounting
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principles to the private sector. The Financial Accounting Standards
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Board has played the major role in establishing accounting standards
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since 1973. Regulation of the accounting profession was substantially
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turned over to the Public Company Accounting Oversight Board in 2002.
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1- 2. j j j Consistency is obtained through the application of the same accounting
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principle from period to period. A change in principle requires statement
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disclosure.
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,1- 3.
j The concept of historical cost determines the balance sheet valuation of land. The
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realization concept requires that a transaction needsto occur for the profit to be
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recognized.
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1- 4.
j a. Entity j e. Historical cost
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b. Realization f. Historical cost
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c. Materiality g. Disclosure j




d. Conservatism



1- 5.
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1- 6. Generally accepted accounting principles do not apply when a firm does not appear
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to be a going concern. If the decision is made that this is not a going concern, then
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the use of GAAP would not be appropriate.
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1- 7.
j With the time period assumption, inaccuracies of accounting for the entity, short of
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its completelife 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
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words, the decision is made to accept some inaccuracy because of incomplete
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information about the future in exchange for more timely reporting. The
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statements are considered to be meaningful because material inaccuracies are
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not acceptable.
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1- 8. It is true that the only accurate way to account for the success or failure of an entity is to
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accumulate all transactions from the opening of business until the business
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eventually liquidates. But it is not necessary that the statements be completely
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accurate in order for them to be meaningful.
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, 1- 9. a. A year that ends when operations are at a lowebb for the year.
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b. The accounting time period isended onDecember 31.
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c. A twelve-month accounting period that ends atthe end of a month other than
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December 31. j j




1-10. Money.



1-11. When money does not hold a stable value, the financial statements can lose much
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of their significance. To the extent thatmoney does not remain stable, it loses
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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
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statements. The items that are included inthe indexmust be representative. In
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addition, the prices of items change because of various factors, such as quality,
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technology, and inflation.
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Yes. A reasonable adjustment to the statements can be made for inflation.
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1-13. False. An arbitrary write-off of inventory cannot be justified under the
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conservatismconcept. The conservatismconcept can only beapplied where
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there are alternative measurements and each of these alternative
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measurements has reasonable support.
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1-14. Yes, inventory that has a market value below the historical cost should be written
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down in order to recognize a loss. This is done based upon the concept of
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conservatism. Losses that can bereasonablyanticipated should be taken in
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order to reflect the least favorable effect on net income of the current period.
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