Solution Manual For Financial Statement Analysis,
b b b b b
13th Edition
b
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
b b b b b b b b b b b
, Chapter 1 b
b Introduction to Financial Reporting b b b
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
b b b b b b b b b b b b
primary responsibility for the development of generally accepted
b b b b b b b b
accounting principles. Their role was substantially reduced in 1973 when
b b b b b b b b b b
the Financial Accounting Standards Board was established. Their role was
b b b b b b b b b b
further reduced with the establishment of the Public Company Accounting
b b b b b b b b b b
Oversight Board was established in 2002.
b b b b b b
b. The Financial Accounting Standards Board replaced the Accounting
b b b b b b b
Principles Board as the primary rule-making body for accounting
b b b b b b b b b
standards. It is an independent organization and includes members
b b b b b b b b b
other than public accountants.
b b b b
c. The SEC has the authority to determine generally accepted accounting
b b b b b b b b b
principles and to regulate the accounting profession. The SEC has
b b b b b b b b b b
elected to leave much of the determination of generally accepted
b b b b b b b b b b
accounting principles to the private sector. The Financial Accounting
b b b b b b b b b
Standards Board has played the major role in establishing accounting
b b b b b b b b b b
standards since 1973. Regulation of the accounting profession was
b b b b b b b b b
substantially turned over to the Public Company Accounting Oversight
b b b b b b b b b
Board in 2002.
b b b
1- 2.
b Consistency is obtained through the application of the same accounting
b b b b b b b b b
principle from period to period. A change in principle requires statement
b b b b b b b b b b b
disclosure.
b
1- 3.
b The concept of historical cost determines the balance sheet valuation of land. The
b b b b b b b b b b b b
realization concept requires that a transaction needs to occur for the profit to be
b b b b b b b b b b b b b b
recognized.
b
1- 4.
b a. Entity
b e. Historical cost b b
b. Realization f. Historical cost b b
c. Materiality g. Disclosure b
d. Conservatism
1- 5.
b Entity concept b
,1- 6.
b Generally accepted accounting principles do not apply when a firm does not b b b b b b b b b b b
appear to be a going concern. If the decision is made that this is not a going
b b b b b b b b b b b b b b b b b
concern, then the use of GAAP would not be appropriate.
b b b b b b b b b b
1- 7.
b With the time period assumption, inaccuracies of accounting for the entity, short
b b b b b b b b b b b
of its complete life span, are accepted. The assumption is made that the entity can
b b b b b b b b b b b b b b b
be accounted for reasonably accurately for a particular period of time. In other
b b b b b b b b b b b b b
words, the decision is made to accept some inaccuracy because of incomplete
b b b b b b b b b b b b
information about the future in exchange for more timely reporting. The
b b b b b b b b b b b
statements are considered to be meaningful because material inaccuracies are
b b b b b b b b b b
not acceptable.
b b
1- 8. b b It is true that the only accurate way to account for the success or failure of an entity
b b b b b b b b b b b b b b b b b
is to accumulate all transactions from the opening of business until the business
b b b b b b b b b b b b b
eventually liquidates. But it is not necessary that the statements be completely
b b b b b b b b b b b b
accurate in order for them to be meaningful.
b b b b b b b b
1- 9. a. A year that ends when operations are at a low ebb for the year.
b b b b b b b b b b b b b
b. The accounting time period is ended on December 31.
b b b b b b b b
c. A twelve-month accounting period that ends at the end of a month other
b b b b b b b b b b b b
than December 31.
b b b
1-10. Money.
1-11. b b When money does not hold a stable value, the financial statements can lose
b b b b b b b b b b b b
much of their significance. To the extent that money does not remain stable, it
b b b b b b b b b b b b b b
loses usefulness as the standard for measuring financial transactions.
b b b b b b b b b
1-12. No. There is a problem with determining the index in order to adjust the
b b b b b b b b b b b b b
statements. The items that are included in the index must be representative. In
b b b b b b b b b b b b b
addition, the prices of items change because of various factors, such as quality,
b b b b b b b b b b b b b
technology, and inflation.
b b b
Yes. A reasonable adjustment to the statements can be made for inflation.
b b b b b b b b b b b
1-13. False. An arbitrary write-off of inventory cannot be justified under the
b b b b b b b b b b
conservatism concept. The conservatism concept can only be applied where
b b b b b b b b b b
there are alternative measurements and each of these alternative
b b b b b b b b b
measurements has reasonable support.
b b b b
1-14. Yes, inventory that has a market value below the historical cost should be
b b b b b b b b b b b b
written down in order to recognize a loss. This is done based upon the concept
b b b b b b b b b b b b b b b
of conservatism. Losses that can be reasonably anticipated should be taken in
b b b b b b b b b b b b
order to reflect the least favorable effect on net income of the current period.
b b b b b b b b b b b b b b
, 1-15. End of production
b b
The realization of revenue at the completion of the production process is
b b b b b b b b b b b
acceptable when the price of the item is known and there is a ready market.
b b b b b b b b b b b b b b b
Receipt of cash b b
This method should only be used when the prospects of collection are especially
b b b b b b b b b b b b
doubtful at the time of sale.
b b b b b b
During production b
This method is allowed for long-term construction projects because recognizing
b b b b b b b b b
revenue on long-term construction projects as work progresses tends to give a
b b b b b b b b b b b b
fairer picture of the results for a given period in comparison with having the
b b b b b b b b b b b b b b
entire revenue realized in one period of time.
b b b b b b b b
1-16. It is difficult to apply the matching concept when there is no direct connection
b b b b b b b b b b b b b
between the cost and revenue. Under these circumstances, accountants often
b b b b b b b b b b
charge off the cost in the period incurred in order to be conservative.
b b b b b b b b b b b b b
1-17. If the entity can justify the use of an alternative accounting method on the
b b b b b b b b b b b b b
basis that it is rational, then the change can be made.
b b b b b b b b b b b
1-18. The accounting reports must disclose all facts that may influence the judgment
b b b b b b b b b b b
of an informed reader. Usually this is a judgment decision for the accountant to
b b b b b b b b b b b b b b
make. Because of the complexity of many businesses and the increased
b b b b b b b b b b b
expectations of the public, the full disclosure concept has become one of the
b b b b b b b b b b b b b
most difficult concepts for the accountant to apply.
b b b b b b b b
1-19. There is a preference for the use of objectivity in the preparation of financial
b b b b b b b b b b b b b
statements, but financial statements cannot be completely prepared based
b b b b b b b b b
upon objective data; estimates must be made in many situations.
b b b b b b b b b b
1-20. This is a true statement. The concept of materiality allows the accountant to
b b b b b b b b b b b b
handle immaterial items in the most economical and expedient manner
b b b b b b b b b b
possible.
b
1-21. Some industry practices lead to accounting reports that do not conform to
b b b b b b b b b b b
generally accepted accounting principles. These reports are considered to be
b b b b b b b b b b
acceptable, but the accounting profession is making an effort to eliminate
b b b b b b b b b b b
particular industry practices that do not conform to the normal generally accepted
b b b b b b b b b b b b
accounting principles.
b b
1-22. Events that fall outside of the financial transactions of the entity are not
b b b b b b b b b b b b
recorded. An example would be the loss of a major customer.
b b b b b b b b b b b
b b b b b
13th Edition
b
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
b b b b b b b b b b b
, Chapter 1 b
b Introduction to Financial Reporting b b b
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
b b b b b b b b b b b b
primary responsibility for the development of generally accepted
b b b b b b b b
accounting principles. Their role was substantially reduced in 1973 when
b b b b b b b b b b
the Financial Accounting Standards Board was established. Their role was
b b b b b b b b b b
further reduced with the establishment of the Public Company Accounting
b b b b b b b b b b
Oversight Board was established in 2002.
b b b b b b
b. The Financial Accounting Standards Board replaced the Accounting
b b b b b b b
Principles Board as the primary rule-making body for accounting
b b b b b b b b b
standards. It is an independent organization and includes members
b b b b b b b b b
other than public accountants.
b b b b
c. The SEC has the authority to determine generally accepted accounting
b b b b b b b b b
principles and to regulate the accounting profession. The SEC has
b b b b b b b b b b
elected to leave much of the determination of generally accepted
b b b b b b b b b b
accounting principles to the private sector. The Financial Accounting
b b b b b b b b b
Standards Board has played the major role in establishing accounting
b b b b b b b b b b
standards since 1973. Regulation of the accounting profession was
b b b b b b b b b
substantially turned over to the Public Company Accounting Oversight
b b b b b b b b b
Board in 2002.
b b b
1- 2.
b Consistency is obtained through the application of the same accounting
b b b b b b b b b
principle from period to period. A change in principle requires statement
b b b b b b b b b b b
disclosure.
b
1- 3.
b The concept of historical cost determines the balance sheet valuation of land. The
b b b b b b b b b b b b
realization concept requires that a transaction needs to occur for the profit to be
b b b b b b b b b b b b b b
recognized.
b
1- 4.
b a. Entity
b e. Historical cost b b
b. Realization f. Historical cost b b
c. Materiality g. Disclosure b
d. Conservatism
1- 5.
b Entity concept b
,1- 6.
b Generally accepted accounting principles do not apply when a firm does not b b b b b b b b b b b
appear to be a going concern. If the decision is made that this is not a going
b b b b b b b b b b b b b b b b b
concern, then the use of GAAP would not be appropriate.
b b b b b b b b b b
1- 7.
b With the time period assumption, inaccuracies of accounting for the entity, short
b b b b b b b b b b b
of its complete life span, are accepted. The assumption is made that the entity can
b b b b b b b b b b b b b b b
be accounted for reasonably accurately for a particular period of time. In other
b b b b b b b b b b b b b
words, the decision is made to accept some inaccuracy because of incomplete
b b b b b b b b b b b b
information about the future in exchange for more timely reporting. The
b b b b b b b b b b b
statements are considered to be meaningful because material inaccuracies are
b b b b b b b b b b
not acceptable.
b b
1- 8. b b It is true that the only accurate way to account for the success or failure of an entity
b b b b b b b b b b b b b b b b b
is to accumulate all transactions from the opening of business until the business
b b b b b b b b b b b b b
eventually liquidates. But it is not necessary that the statements be completely
b b b b b b b b b b b b
accurate in order for them to be meaningful.
b b b b b b b b
1- 9. a. A year that ends when operations are at a low ebb for the year.
b b b b b b b b b b b b b
b. The accounting time period is ended on December 31.
b b b b b b b b
c. A twelve-month accounting period that ends at the end of a month other
b b b b b b b b b b b b
than December 31.
b b b
1-10. Money.
1-11. b b When money does not hold a stable value, the financial statements can lose
b b b b b b b b b b b b
much of their significance. To the extent that money does not remain stable, it
b b b b b b b b b b b b b b
loses usefulness as the standard for measuring financial transactions.
b b b b b b b b b
1-12. No. There is a problem with determining the index in order to adjust the
b b b b b b b b b b b b b
statements. The items that are included in the index must be representative. In
b b b b b b b b b b b b b
addition, the prices of items change because of various factors, such as quality,
b b b b b b b b b b b b b
technology, and inflation.
b b b
Yes. A reasonable adjustment to the statements can be made for inflation.
b b b b b b b b b b b
1-13. False. An arbitrary write-off of inventory cannot be justified under the
b b b b b b b b b b
conservatism concept. The conservatism concept can only be applied where
b b b b b b b b b b
there are alternative measurements and each of these alternative
b b b b b b b b b
measurements has reasonable support.
b b b b
1-14. Yes, inventory that has a market value below the historical cost should be
b b b b b b b b b b b b
written down in order to recognize a loss. This is done based upon the concept
b b b b b b b b b b b b b b b
of conservatism. Losses that can be reasonably anticipated should be taken in
b b b b b b b b b b b b
order to reflect the least favorable effect on net income of the current period.
b b b b b b b b b b b b b b
, 1-15. End of production
b b
The realization of revenue at the completion of the production process is
b b b b b b b b b b b
acceptable when the price of the item is known and there is a ready market.
b b b b b b b b b b b b b b b
Receipt of cash b b
This method should only be used when the prospects of collection are especially
b b b b b b b b b b b b
doubtful at the time of sale.
b b b b b b
During production b
This method is allowed for long-term construction projects because recognizing
b b b b b b b b b
revenue on long-term construction projects as work progresses tends to give a
b b b b b b b b b b b b
fairer picture of the results for a given period in comparison with having the
b b b b b b b b b b b b b b
entire revenue realized in one period of time.
b b b b b b b b
1-16. It is difficult to apply the matching concept when there is no direct connection
b b b b b b b b b b b b b
between the cost and revenue. Under these circumstances, accountants often
b b b b b b b b b b
charge off the cost in the period incurred in order to be conservative.
b b b b b b b b b b b b b
1-17. If the entity can justify the use of an alternative accounting method on the
b b b b b b b b b b b b b
basis that it is rational, then the change can be made.
b b b b b b b b b b b
1-18. The accounting reports must disclose all facts that may influence the judgment
b b b b b b b b b b b
of an informed reader. Usually this is a judgment decision for the accountant to
b b b b b b b b b b b b b b
make. Because of the complexity of many businesses and the increased
b b b b b b b b b b b
expectations of the public, the full disclosure concept has become one of the
b b b b b b b b b b b b b
most difficult concepts for the accountant to apply.
b b b b b b b b
1-19. There is a preference for the use of objectivity in the preparation of financial
b b b b b b b b b b b b b
statements, but financial statements cannot be completely prepared based
b b b b b b b b b
upon objective data; estimates must be made in many situations.
b b b b b b b b b b
1-20. This is a true statement. The concept of materiality allows the accountant to
b b b b b b b b b b b b
handle immaterial items in the most economical and expedient manner
b b b b b b b b b b
possible.
b
1-21. Some industry practices lead to accounting reports that do not conform to
b b b b b b b b b b b
generally accepted accounting principles. These reports are considered to be
b b b b b b b b b b
acceptable, but the accounting profession is making an effort to eliminate
b b b b b b b b b b b
particular industry practices that do not conform to the normal generally accepted
b b b b b b b b b b b b
accounting principles.
b b
1-22. Events that fall outside of the financial transactions of the entity are not
b b b b b b b b b b b b
recorded. An example would be the loss of a major customer.
b b b b b b b b b b b
