SCHOLARVAULT
Chapter #au1
# a u Introduction #auto #auFinancial
#auReporting
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
© #au2013 #auCengage #auLearning. #auAll #auRights #auReserved. #auThis #auedition #auis #auintended #aufor #auuse #auoutside #auof #authe #auU.S. #auonly, #auwith
#aucontent #authat #aumay #aube #audifferent #aufrom # a u the #auU.S. #auEdition. #auMay #aunot #aube #auscanned, #aucopied, #auduplicated, #auor
#auposted #auto #aua #aupublicly #auaccessible #auwebsite, #auin #auwhole #auor #auin #aupart.
,SCHOLARVAULT
1- #au6. Generally #auaccepted #auaccounting #auprinciples #audo #aunot #auapply #auwhen #aua
#aufirm #audoes #aunot #auappear #auto #aube #aua #augoing #auconcern. # a u If #authe #audecision
#auis #aumade #authat #authis #auis #aunot #aua #augoing #auconcern, #authen #authe #auuse #auof
#auGAAP #auwould #aunot #aube #auappropriate.
1- #au7. With #authe #autime #auperiod #auassumption, #auinaccuracies #auof #auaccounting #aufor
#authe #auentity, #aushort #auof #auits #aucomplete #aulife #auspan, #auare #auaccepted. #auThe
#auassumption #auis #aumade #authat #authe #auentity #aucan #aube #auaccounted #aufor
#aureasonably #auaccurately #aufor #aua #auparticular #auperiod #auof #autime. # a u In #auother
#auwords, #authe #audecision #auis #aumade #auto #auaccept #ausome #auinaccuracy #aubecause
#auof #auincomplete #auinformation #auabout #authe #aufuture #auin #auexchange #aufor #aumore
#autimely #aureporting. # a u The #austatements #auare #auconsidered #auto #aube #aumeaningful
#aubecause #aumaterial #auinaccuracies #auare #aunot #auacceptable.
1- 8. # a u It #auis #autrue #authat #authe #auonly #auaccurate #auway #auto #auaccount #aufor #authe
# a u
#ausuccess #auor #aufailure #auof #auan #auentity #auis #auto #auaccumulate #auall #autransactions
#aufrom #authe #auopening #auof #aubusiness #auuntil #authe #aubusiness #aueventually
#auliquidates. # a u But #auit #auis #aunot #aunecessary #authat #authe #austatements #aube
#aucompletely #auaccurate #auin #auorder #aufor #authem #auto #aube #aumeaningful.
1- 9. a. A #auyear #authat #auends #auwhen #auoperations #auare #auat #aua #aulow #auebb #aufor #authe #auyear.
b. The #auaccounting #autime #auperiod #auis #auended #auon #auDecember #au31.
c. A #autwelve-month #auaccounting #auperiod #authat #auends #auat #authe #auend #auof #aua
#aumonth #auother #authan #auDecember #au31.
1-10. Money.
1-11. # a u # a u When #aumoney #audoes #aunot #auhold #aua #austable #auvalue, #authe #aufinancial
#austatements #aucan #aulose #aumuch #auof #autheir #ausignificance. # a u To #authe #auextent
#authat #aumoney #audoes #aunot #auremain #austable, #auit #auloses #auusefulness #auas #authe
#austandard #aufor #aumeasuring #aufinancial #autransactions.
1-12. No. # a u There #auis #aua #auproblem #auwith #audetermining #authe #auindex #auin #auorder #auto
#auadjust #authe #austatements. # a u The #auitems #authat #auare #auincluded #auin #authe
#auindex #aumust #aube #aurepresentative. #auIn #auaddition, #authe #auprices #auof #auitems
#auchange #aubecause #auof #auvarious #aufactors, #ausuch #auas #auquality, #autechnology,
#auand #auinflation.
Yes. #auA #aureasonable #auadjustment #auto #authe #austatements #aucan #aube #aumade #aufor #auinflation.
1-13. False. # a u An #auarbitrary #auwrite-off #auof #auinventory #aucannot #aube #aujustified
#auunder #authe #auconservatism #auconcept. # a u The #auconservatism #auconcept #aucan
#auonly #aube #auapplied #auwhere #authere #auare #aualternative #aumeasurements #auand
#aueach #auof #authese #aualternative #aumeasurements #auhas #aureasonable #ausupport.
2
© #au2013 #auCengage #auLearning. #auAll #auRights #auReserved. #auThis #auedition #auis #auintended #aufor #auuse #auoutside #auof #authe #auU.S. #auonly, #auwith
#aucontent #authat #aumay #aube #audifferent #aufrom # a u the #auU.S. #auEdition. #auMay #aunot #aube #auscanned, #aucopied, #auduplicated, #auor
#auposted #auto #aua #aupublicly #auaccessible #auwebsite, #auin #auwhole #auor #auin #aupart.
,SCHOLARVAULT
1-14. Yes, #auinventory #authat #auhas #aua #aumarket #auvalue #aubelow #authe #auhistorical #aucost
#aushould #aube #auwritten #audown #auin #auorder #auto #aurecognize #aua #auloss. # a u This #auis
#audone #aubased #auupon #authe #auconcept #auof #auconservatism. # a u Losses #authat
#aucan #aube #aureasonably #auanticipated #aushould #aube #autaken #auin #auorder #auto
#aureflect #authe #auleast #aufavorable #aueffect #auon #aunet #auincome #auof #authe #aucurrent
#auperiod.
3
© #au2013 #auCengage #auLearning. #auAll #auRights #auReserved. #auThis #auedition #auis #auintended #aufor #auuse #auoutside #auof #authe #auU.S. #auonly, #auwith
#aucontent #authat #aumay #aube #audifferent #aufrom # a u the #auU.S. #auEdition. #auMay #aunot #aube #auscanned, #aucopied, #auduplicated, #auor
#auposted #auto #aua #aupublicly #auaccessible #auwebsite, #auin #auwhole #auor #auin #aupart.
, SCHOLARVAULT
1-15. End #auof #auproduction
The #aurealization #auof #aurevenue #auat #authe #aucompletion #auof #authe #auproduction
#auprocess #auis #auacceptable #auwhen #authe #auprice #auof #authe #auitem #auis #auknown #auand
#authere #auis #aua #auready #aumarket.
Receipt #auof #aucash
This #aumethod #aushould #auonly #aube #auused #auwhen #authe #auprospects #auof
#aucollection #auare #auespecially #audoubtful #auat #authe #autime #auof #ausale.
During #auproduction
This #aumethod #auis #auallowed #aufor #aulong-term #auconstruction #auprojects
#aubecause #aurecognizing #aurevenue #auon #aulong-term #auconstruction #auprojects #auas
#auwork #auprogresses #autends #auto #augive #aua #aufairer #aupicture #auof #authe #auresults
#aufor #aua #augiven #auperiod #auin #aucomparison #auwith #auhaving #authe #auentire
#aurevenue #aurealized #auin #auone #auperiod #auof #autime.
1-16. It #auis #audifficult #auto #auapply #authe #aumatching #auconcept #auwhen #authere #auis #auno
#audirect #auconnection #aubetween #authe #aucost #auand #aurevenue. # a u Under #authese
#aucircumstances, #auaccountants #auoften #aucharge #auoff #authe #aucost #auin #authe
#auperiod #auincurred #auin #auorder #auto #aube #auconservative.
1-17. If #authe #auentity #aucan #aujustify #authe #auuse #auof #auan #aualternative #auaccounting
#aumethod #auon #authe #aubasis #authat #auit #auis #aurational, #authen #authe #auchange #aucan
#aube #aumade.
1-18. The #auaccounting #aureports #aumust #audisclose #auall #aufacts #authat #aumay #auinfluence
#authe #aujudgment #auof #auan #auinformed #aureader. # a u Usually #authis #auis #aua
#aujudgment #audecision #aufor #authe #auaccountant #auto #aumake. # a u Because #auof #authe
#aucomplexity #auof #aumany #aubusinesses #auand #authe #auincreased #auexpectations #auof
#authe #aupublic, #authe #aufull #audisclosure #auconcept #auhas #aubecome #auone #auof #authe
#aumost #audifficult #auconcepts #aufor #authe #auaccountant #auto #auapply.
1-19. There #auis #aua #aupreference #aufor #authe #auuse #auof #auobjectivity #auin #authe
#aupreparation #auof #aufinancial #austatements, #aubut #aufinancial #austatements
#aucannot #aube #aucompletely #auprepared #aubased #auupon #auobjective #audata;
#auestimates #aumust #aube #aumade #auin #aumany #ausituations.
1-20. This #auis #aua #autrue #austatement. # a u The #auconcept #auof #aumateriality #auallows #authe
#auaccountant #auto #auhandle #auimmaterial #auitems #auin #authe #aumost #aueconomical
#auand #auexpedient #aumanner #aupossible.
1-21. Some #auindustry #aupractices #aulead #auto #auaccounting #aureports #authat #audo #aunot
#auconform #auto #augenerally #auaccepted #auaccounting #auprinciples. # a u These
#aureports #auare #auconsidered #auto #aube #auacceptable, #aubut #authe #auaccounting
4
© #au2013 #auCengage #auLearning. #auAll #auRights #auReserved. #auThis #auedition #auis #auintended #aufor #auuse #auoutside #auof #authe #auU.S. #auonly, #auwith
#aucontent #authat #aumay #aube #audifferent #aufrom # a u the #auU.S. #auEdition. #auMay #aunot #aube #auscanned, #aucopied, #auduplicated, #auor
#auposted #auto #aua #aupublicly #auaccessible #auwebsite, #auin #auwhole #auor #auin #aupart.
Chapter #au1
# a u Introduction #auto #auFinancial
#auReporting
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
© #au2013 #auCengage #auLearning. #auAll #auRights #auReserved. #auThis #auedition #auis #auintended #aufor #auuse #auoutside #auof #authe #auU.S. #auonly, #auwith
#aucontent #authat #aumay #aube #audifferent #aufrom # a u the #auU.S. #auEdition. #auMay #aunot #aube #auscanned, #aucopied, #auduplicated, #auor
#auposted #auto #aua #aupublicly #auaccessible #auwebsite, #auin #auwhole #auor #auin #aupart.
,SCHOLARVAULT
1- #au6. Generally #auaccepted #auaccounting #auprinciples #audo #aunot #auapply #auwhen #aua
#aufirm #audoes #aunot #auappear #auto #aube #aua #augoing #auconcern. # a u If #authe #audecision
#auis #aumade #authat #authis #auis #aunot #aua #augoing #auconcern, #authen #authe #auuse #auof
#auGAAP #auwould #aunot #aube #auappropriate.
1- #au7. With #authe #autime #auperiod #auassumption, #auinaccuracies #auof #auaccounting #aufor
#authe #auentity, #aushort #auof #auits #aucomplete #aulife #auspan, #auare #auaccepted. #auThe
#auassumption #auis #aumade #authat #authe #auentity #aucan #aube #auaccounted #aufor
#aureasonably #auaccurately #aufor #aua #auparticular #auperiod #auof #autime. # a u In #auother
#auwords, #authe #audecision #auis #aumade #auto #auaccept #ausome #auinaccuracy #aubecause
#auof #auincomplete #auinformation #auabout #authe #aufuture #auin #auexchange #aufor #aumore
#autimely #aureporting. # a u The #austatements #auare #auconsidered #auto #aube #aumeaningful
#aubecause #aumaterial #auinaccuracies #auare #aunot #auacceptable.
1- 8. # a u It #auis #autrue #authat #authe #auonly #auaccurate #auway #auto #auaccount #aufor #authe
# a u
#ausuccess #auor #aufailure #auof #auan #auentity #auis #auto #auaccumulate #auall #autransactions
#aufrom #authe #auopening #auof #aubusiness #auuntil #authe #aubusiness #aueventually
#auliquidates. # a u But #auit #auis #aunot #aunecessary #authat #authe #austatements #aube
#aucompletely #auaccurate #auin #auorder #aufor #authem #auto #aube #aumeaningful.
1- 9. a. A #auyear #authat #auends #auwhen #auoperations #auare #auat #aua #aulow #auebb #aufor #authe #auyear.
b. The #auaccounting #autime #auperiod #auis #auended #auon #auDecember #au31.
c. A #autwelve-month #auaccounting #auperiod #authat #auends #auat #authe #auend #auof #aua
#aumonth #auother #authan #auDecember #au31.
1-10. Money.
1-11. # a u # a u When #aumoney #audoes #aunot #auhold #aua #austable #auvalue, #authe #aufinancial
#austatements #aucan #aulose #aumuch #auof #autheir #ausignificance. # a u To #authe #auextent
#authat #aumoney #audoes #aunot #auremain #austable, #auit #auloses #auusefulness #auas #authe
#austandard #aufor #aumeasuring #aufinancial #autransactions.
1-12. No. # a u There #auis #aua #auproblem #auwith #audetermining #authe #auindex #auin #auorder #auto
#auadjust #authe #austatements. # a u The #auitems #authat #auare #auincluded #auin #authe
#auindex #aumust #aube #aurepresentative. #auIn #auaddition, #authe #auprices #auof #auitems
#auchange #aubecause #auof #auvarious #aufactors, #ausuch #auas #auquality, #autechnology,
#auand #auinflation.
Yes. #auA #aureasonable #auadjustment #auto #authe #austatements #aucan #aube #aumade #aufor #auinflation.
1-13. False. # a u An #auarbitrary #auwrite-off #auof #auinventory #aucannot #aube #aujustified
#auunder #authe #auconservatism #auconcept. # a u The #auconservatism #auconcept #aucan
#auonly #aube #auapplied #auwhere #authere #auare #aualternative #aumeasurements #auand
#aueach #auof #authese #aualternative #aumeasurements #auhas #aureasonable #ausupport.
2
© #au2013 #auCengage #auLearning. #auAll #auRights #auReserved. #auThis #auedition #auis #auintended #aufor #auuse #auoutside #auof #authe #auU.S. #auonly, #auwith
#aucontent #authat #aumay #aube #audifferent #aufrom # a u the #auU.S. #auEdition. #auMay #aunot #aube #auscanned, #aucopied, #auduplicated, #auor
#auposted #auto #aua #aupublicly #auaccessible #auwebsite, #auin #auwhole #auor #auin #aupart.
,SCHOLARVAULT
1-14. Yes, #auinventory #authat #auhas #aua #aumarket #auvalue #aubelow #authe #auhistorical #aucost
#aushould #aube #auwritten #audown #auin #auorder #auto #aurecognize #aua #auloss. # a u This #auis
#audone #aubased #auupon #authe #auconcept #auof #auconservatism. # a u Losses #authat
#aucan #aube #aureasonably #auanticipated #aushould #aube #autaken #auin #auorder #auto
#aureflect #authe #auleast #aufavorable #aueffect #auon #aunet #auincome #auof #authe #aucurrent
#auperiod.
3
© #au2013 #auCengage #auLearning. #auAll #auRights #auReserved. #auThis #auedition #auis #auintended #aufor #auuse #auoutside #auof #authe #auU.S. #auonly, #auwith
#aucontent #authat #aumay #aube #audifferent #aufrom # a u the #auU.S. #auEdition. #auMay #aunot #aube #auscanned, #aucopied, #auduplicated, #auor
#auposted #auto #aua #aupublicly #auaccessible #auwebsite, #auin #auwhole #auor #auin #aupart.
, SCHOLARVAULT
1-15. End #auof #auproduction
The #aurealization #auof #aurevenue #auat #authe #aucompletion #auof #authe #auproduction
#auprocess #auis #auacceptable #auwhen #authe #auprice #auof #authe #auitem #auis #auknown #auand
#authere #auis #aua #auready #aumarket.
Receipt #auof #aucash
This #aumethod #aushould #auonly #aube #auused #auwhen #authe #auprospects #auof
#aucollection #auare #auespecially #audoubtful #auat #authe #autime #auof #ausale.
During #auproduction
This #aumethod #auis #auallowed #aufor #aulong-term #auconstruction #auprojects
#aubecause #aurecognizing #aurevenue #auon #aulong-term #auconstruction #auprojects #auas
#auwork #auprogresses #autends #auto #augive #aua #aufairer #aupicture #auof #authe #auresults
#aufor #aua #augiven #auperiod #auin #aucomparison #auwith #auhaving #authe #auentire
#aurevenue #aurealized #auin #auone #auperiod #auof #autime.
1-16. It #auis #audifficult #auto #auapply #authe #aumatching #auconcept #auwhen #authere #auis #auno
#audirect #auconnection #aubetween #authe #aucost #auand #aurevenue. # a u Under #authese
#aucircumstances, #auaccountants #auoften #aucharge #auoff #authe #aucost #auin #authe
#auperiod #auincurred #auin #auorder #auto #aube #auconservative.
1-17. If #authe #auentity #aucan #aujustify #authe #auuse #auof #auan #aualternative #auaccounting
#aumethod #auon #authe #aubasis #authat #auit #auis #aurational, #authen #authe #auchange #aucan
#aube #aumade.
1-18. The #auaccounting #aureports #aumust #audisclose #auall #aufacts #authat #aumay #auinfluence
#authe #aujudgment #auof #auan #auinformed #aureader. # a u Usually #authis #auis #aua
#aujudgment #audecision #aufor #authe #auaccountant #auto #aumake. # a u Because #auof #authe
#aucomplexity #auof #aumany #aubusinesses #auand #authe #auincreased #auexpectations #auof
#authe #aupublic, #authe #aufull #audisclosure #auconcept #auhas #aubecome #auone #auof #authe
#aumost #audifficult #auconcepts #aufor #authe #auaccountant #auto #auapply.
1-19. There #auis #aua #aupreference #aufor #authe #auuse #auof #auobjectivity #auin #authe
#aupreparation #auof #aufinancial #austatements, #aubut #aufinancial #austatements
#aucannot #aube #aucompletely #auprepared #aubased #auupon #auobjective #audata;
#auestimates #aumust #aube #aumade #auin #aumany #ausituations.
1-20. This #auis #aua #autrue #austatement. # a u The #auconcept #auof #aumateriality #auallows #authe
#auaccountant #auto #auhandle #auimmaterial #auitems #auin #authe #aumost #aueconomical
#auand #auexpedient #aumanner #aupossible.
1-21. Some #auindustry #aupractices #aulead #auto #auaccounting #aureports #authat #audo #aunot
#auconform #auto #augenerally #auaccepted #auaccounting #auprinciples. # a u These
#aureports #auare #auconsidered #auto #aube #auacceptable, #aubut #authe #auaccounting
4
© #au2013 #auCengage #auLearning. #auAll #auRights #auReserved. #auThis #auedition #auis #auintended #aufor #auuse #auoutside #auof #authe #auU.S. #auonly, #auwith
#aucontent #authat #aumay #aube #audifferent #aufrom # a u the #auU.S. #auEdition. #auMay #aunot #aube #auscanned, #aucopied, #auduplicated, #auor
#auposted #auto #aua #aupublicly #auaccessible #auwebsite, #auin #auwhole #auor #auin #aupart.
