Solution Manual for Financial Statement Analysis, 13th Edition By Charles H. Gibson

ChapterQ1Q Introducti
onQtoQFinancialQReporting


QUESTIONS

1- 1. a.
TheQAICPAQisQanQorganizationQofQCPAsQthatQpriorQtoQ1973Qacce
ptedQtheQprimaryQresponsibilityQforQtheQdevelopmentQofQgenerallyQa
cceptedQaccountingQprinciples.QTheirQroleQwasQsubstantiallyQreduced
QinQ1973QwhenQtheQFinancialQAccountingQStandardsQBoardQwasQe
stablished.Q TheirQroleQwasQfurtherQreducedQwithQtheQestablishment
QofQtheQPublicQCompanyQAccountingQOversightQBoardQwasQestablis
hedQinQ2002.

b. TheQFinancialQAccountingQStandardsQBoardQreplacedQtheQAcco
untingQPrinciplesQBoardQasQtheQprimaryQrule-
makingQbodyQforQaccountingQstandards.QItQisQanQindependentQ
organizationQandQincludesQmembersQotherQthanQpublicQaccount
ants.

c. TheQSECQhasQtheQauthorityQtoQdetermineQgenerallyQacceptedQacc
ountingQprinciplesQandQtoQregulateQtheQaccountingQprofession.QTh
eQSECQhasQelectedQtoQleaveQmuchQofQtheQdeterminationQofQgen
erallyQacceptedQaccountingQprinciplesQtoQtheQprivateQsector.Q The
QFinancialQAccountingQStandardsQBoardQhasQplayedQtheQmajorQro
leQinQestablishingQaccountingQstandardsQsinceQ1973.Q RegulationQ
ofQtheQaccountingQprofessionQwasQsubstantiallyQturnedQoverQtoQth
eQPublicQCompanyQAccountingQOversightQBoardQinQ2002.

1-Q2.
ConsistencyQisQobtainedQthroughQtheQapplicationQofQtheQsameQacc
ountingQprincipleQfromQperiodQtoQperiod.Q AQchangeQinQprincipleQre
quiresQstatementQdisclosure.

1-Q3.
TheQconceptQofQhistoricalQcostQdeterminesQtheQbalanceQsheetQvaluationQ
ofQland.QTheQrealizationQconceptQrequiresQthatQaQtransactionQneedsQtoQo
ccurQforQtheQprofitQtoQbeQrecognized.

1-Q4. a.Q Entity e.Q HistoricalQcost

b. Realization f.Q HistoricalQcost

c. Materiality g.Q Disclosure

, d. Conservatism

1-Q5. EntityQconcept
1-Q6.
GenerallyQacceptedQaccountingQprinciplesQdoQnotQapplyQwhenQaQfirmQ
doesQnotQappearQtoQbeQaQgoingQconcern.Q IfQtheQdecisionQisQmadeQth
atQthisQisQnotQaQgoingQconcern,QthenQtheQuseQofQGAAPQwouldQnotQb
eQappropriate.

1-Q7.
WithQtheQtimeQperiodQassumption,QinaccuraciesQofQaccountingQforQtheQe
ntity,QshortQofQitsQcompleteQlifeQspan,QareQaccepted.QTheQassumptionQis
QmadeQthatQtheQentityQcanQbeQaccountedQforQreasonablyQaccuratelyQfor
QaQparticularQperiodQofQtime.Q InQotherQwords,QtheQdecisionQisQmadeQto
QacceptQsomeQinaccuracyQbecauseQofQincompleteQinformationQaboutQthe
QfutureQinQexchangeQforQmoreQtimelyQreporting.Q TheQstatementsQareQco
nsideredQtoQbeQmeaningfulQbecauseQmaterialQinaccuraciesQareQnotQacce
ptable.

1- 8.Q Q ItQisQtrueQthatQtheQonlyQaccurateQwayQtoQaccountQforQtheQsuccessQor
QfailureQofQanQentityQisQtoQaccumulateQallQtransactionsQfromQtheQopeni
ngQofQbusinessQuntilQtheQbusinessQeventuallyQliquidates.Q ButQitQisQnotQ
necessaryQthatQtheQstatementsQbeQcompletelyQaccurateQinQorderQforQth
emQtoQbeQmeaningful.

1- 9. a. AQyearQthatQendsQwhenQoperationsQareQatQaQlowQebbQforQtheQyear.

b. TheQaccountingQtimeQperiodQisQendedQonQDecemberQ31.

c. AQtwelve-
monthQaccountingQperiodQthatQendsQatQtheQendQofQaQmonthQother
QthanQDecemberQ31.

1-10. Money.

1-
11.Q Q WhenQmoneyQdoesQnotQholdQaQstableQvalue,QtheQfinancialQstat
ementsQcanQloseQmuchQofQtheirQsignificance.Q ToQtheQextentQthatQmon
eyQdoesQnotQremainQstable,QitQlosesQusefulnessQasQtheQstandardQforQ
measuringQfinancialQtransactions.

1-12.
No.Q ThereQisQaQproblemQwithQdeterminingQtheQindexQinQorderQtoQadju
stQtheQstatements.Q TheQitemsQthatQareQincludedQinQtheQindexQmustQbe
Qrepresentative.QInQaddition,QtheQpricesQofQitemsQchangeQbecauseQofQv
ariousQfactors,QsuchQasQquality,Qtechnology,QandQinflation.

, Yes.QAQreasonableQadjustmentQtoQtheQstatementsQcanQbeQmadeQforQinflation.

1-13. False.Q AnQarbitraryQwrite-
offQofQinventoryQcannotQbeQjustifiedQunderQtheQconservatismQconcept.Q
TheQconservatismQconceptQcanQonlyQbeQappliedQwhereQthereQareQalter
nativeQmeasurementsQandQeachQofQtheseQalternativeQmeasurementsQha
sQreasonableQsupport.

1-14.
Yes,QinventoryQthatQhasQaQmarketQvalueQbelowQtheQhistoricalQcostQsh
ouldQbeQwrittenQdownQinQorderQtoQrecognizeQaQloss.Q ThisQisQdoneQb
asedQuponQtheQconceptQofQconservatism.Q LossesQthatQcanQbeQreason
ablyQanticipatedQshouldQbeQtakenQinQorderQtoQreflectQtheQleastQfavora
bleQeffectQonQnetQincomeQofQtheQcurrentQperiod.
1-15. EndQofQproduction

TheQrealizationQofQrevenueQatQtheQcompletionQofQtheQproductionQprocess
QisQacceptableQwhenQtheQpriceQofQtheQitemQisQknownQandQthereQisQaQr
eadyQmarket.

ReceiptQofQcash

ThisQmethodQshouldQonlyQbeQusedQwhenQtheQprospectsQofQcollectionQare
QespeciallyQdoubtfulQatQtheQtimeQofQsale.

DuringQproduction

ThisQmethodQisQallowedQforQlong-
termQconstructionQprojectsQbecauseQrecognizingQrevenueQonQlong-
termQconstructionQprojectsQasQworkQprogressesQtendsQtoQgiveQaQfairer
QpictureQofQtheQresultsQforQaQgivenQperiodQinQcomparisonQwithQhaving
QtheQentireQrevenueQrealizedQinQoneQperiodQofQtime.

1-16.
ItQisQdifficultQtoQapplyQtheQmatchingQconceptQwhenQthereQisQnoQdirectQ
connectionQbetweenQtheQcostQandQrevenue.Q UnderQtheseQcircumstance
s,QaccountantsQoftenQchargeQoffQtheQcostQinQtheQperiodQincurredQinQor
derQtoQbeQconservative.

1-17.
IfQtheQentityQcanQjustifyQtheQuseQofQanQalternativeQaccountingQmeth
odQonQtheQbasisQthatQitQisQrational,QthenQtheQchangeQcanQbeQmad
e.

1-18.
TheQaccountingQreportsQmustQdiscloseQallQfactsQthatQmayQinfluenceQthe
QjudgmentQofQanQinformedQreader.Q UsuallyQthisQisQaQjudgmentQdecisio

, nQforQtheQaccountantQtoQmake.Q BecauseQofQtheQcomplexityQofQmanyQ
businessesQandQtheQincreasedQexpectationsQofQtheQpublic,QtheQfullQdisc
losureQconceptQhasQbecomeQoneQofQtheQmostQdifficultQconceptsQforQth
eQaccountantQtoQapply.

1-19.
ThereQisQaQpreferenceQforQtheQuseQofQobjectivityQinQtheQpreparationQ
ofQfinancialQstatements,QbutQfinancialQstatementsQcannotQbeQcompletel
yQpreparedQbasedQuponQobjectiveQdata;QestimatesQmustQbeQmadeQin
QmanyQsituations.

1-20.
ThisQisQaQtrueQstatement.Q TheQconceptQofQmaterialityQallowsQtheQacco
untantQtoQhandleQimmaterialQitemsQinQtheQmostQeconomicalQandQexpe
dientQmannerQpossible.

1-21.
SomeQindustryQpracticesQleadQtoQaccountingQreportsQthatQdoQnotQconfor
mQtoQgenerallyQacceptedQaccountingQprinciples.Q TheseQreportsQareQcons
ideredQtoQbeQacceptable,QbutQtheQaccountingQprofessionQisQmakingQanQ
effortQtoQeliminateQparticularQindustryQpracticesQthatQdoQnotQconformQtoQ
theQnormalQgenerallyQacceptedQaccountingQprinciples.

1-22.
EventsQthatQfallQoutsideQofQtheQfinancialQtransactionsQofQtheQentit
yQareQnotQrecorded.Q AnQexampleQwouldQbeQtheQlossQofQaQmajor
Qcustomer.

1-23.
True.Q TheQaccountingQprofessionQisQmakingQanQeffortQtoQreduceQorQ
eliminateQspecificQindustryQpractices.

1-24.
TheQentityQmustQusuallyQuseQtheQaccrualQbasisQofQaccounting.Q On
lyQunderQlimitedQcircumstancesQcanQtheQentityQuseQtheQcashQbasis
.

1-
25.Q Q TheQFASBQcommencedQtheQAccountingQStandardsQCodification
™QprojectQtoQprovideQaQsingleQsourceQofQauthoritativeQU.S.QGAAPQa
ndQprovideQoneQlevelQofQauthoritativeQGAAP.

1-
26.Q Q TheQseparateQentityQconceptQdirectsQthatQpersonalQtransactions
QofQtheQownersQmustQbeQkeptQseparateQfromQtheirQbusinessQtransacti
ons.
1-27. AtQtheQpointQofQsale