Chapterj1j Introduction
jtojFinancialjReporting
QUESTIONS
1- 1. a.
ThejAICPAjisjanjorganizationjofjCPAsjthatjpriorjtoj1973jacceptedjthejprim
aryjresponsibilityjforjthejdevelopmentjofjgenerallyjacceptedjaccountingjprin
ciples.jTheirjrolejwasjsubstantiallyjreducedjinj1973jwhenjthejFinancialjAcco
untingjStandardsjBoardjwasjestablished.j Theirjrolejwasjfurtherjreducedjwit
hjthejestablishmentjofjthejPublicjCompanyjAccountingjOversightjBoardjwa
sjestablishedjinj2002.
b. ThejFinancialjAccountingjStandardsjBoardjreplacedjthejAccountingjPr
inciplesjBoardjasjthejprimaryjrule-
makingjbodyjforjaccountingjstandards.jItjisjanjindependentjorganizatio
njandjincludesjmembersjotherjthanjpublicjaccountants.
c. ThejSECjhasjthejauthorityjtojdeterminejgenerallyjacceptedjaccountingjpri
nciplesjandjtojregulatejthejaccountingjprofession.jThejSECjhasjelectedjtoj
leavejmuchjofjthejdeterminationjofjgenerallyjacceptedjaccountingjprincipl
esjtojthejprivatejsector.j ThejFinancialjAccountingjStandardsjBoardjhasjpl
ayedjthejmajorjrolejinjestablishingjaccountingjstandardsjsincej1973.j Reg
ulationjofjthejaccountingjprofessionjwasjsubstantiallyjturnedjoverjtojthejP
ublicjCompanyjAccountingjOversightjBoardjinj2002.
1-j2.
Consistencyjisjobtainedjthroughjthejapplicationjofjthejsamejaccountingjpri
nciplejfromjperiodjtojperiod.j Ajchangejinjprinciplejrequiresjstatementjdisclo
sure.
1-j3.
Thejconceptjofjhistoricaljcostjdeterminesjthejbalancejsheetjvaluationjofjland.jThe
jrealizationjconceptjrequiresjthatjajtransactionjneedsjtojoccurjforjthejprofitjtojbejre
cognized.
1-j4. a.j Entity e.j Historicaljcost
b. Realization f.j Historicaljcost
c. Materiality g.j Disclosure
d. Conservatism
1-j5. Entityjconcept
1
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.
,1-j6.
Generallyjacceptedjaccountingjprinciplesjdojnotjapplyjwhenjajfirmjdoesjnotjap
pearjtojbejajgoingjconcern.j Ifjthejdecisionjisjmadejthatjthisjisjnotjajgoingjconcern
,jthenjthejusejofjGAAPjwouldjnotjbejappropriate.
1-j7.
Withjthejtimejperiodjassumption,jinaccuraciesjofjaccountingjforjthejentity,jshortj
ofjitsjcompletejlifejspan,jarejaccepted.jThejassumptionjisjmadejthatjthejentityjcanj
bejaccountedjforjreasonablyjaccuratelyjforjajparticularjperiodjofjtime.j Injotherjwo
rds,jthejdecisionjisjmadejtojacceptjsomejinaccuracyjbecausejofjincompletejinfor
mationjaboutjthejfuturejinjexchangejforjmorejtimelyjreporting.j Thejstatementsjar
ejconsideredjtojbejmeaningfuljbecausejmaterialjinaccuraciesjarejnotjacceptable.
1- 8.j j Itjisjtruejthatjthejonlyjaccuratejwayjtojaccountjforjthejsuccessjorjfailurejofjanjentityjisj
tojaccumulatejalljtransactionsjfromjthejopeningjofjbusinessjuntiljthejbusinessjev
entuallyjliquidates.j Butjitjisjnotjnecessaryjthatjthejstatementsjbejcompletelyjacc
uratejinjorderjforjthemjtojbejmeaningful.
1- 9. a. Ajyearjthatjendsjwhenjoperationsjarejatjajlowjebbjforjthejyear.
b. ThejaccountingjtimejperiodjisjendedjonjDecemberj31.
c. Ajtwelve-
monthjaccountingjperiodjthatjendsjatjthejendjofjajmonthjotherjthanjDecem
berj31.
1-10. Money.
1-
11.j j Whenjmoneyjdoesjnotjholdjajstablejvalue,jthejfinancialjstatementsjcanjlos
ejmuchjofjtheirjsignificance.j Tojthejextentjthatjmoneyjdoesjnotjremainjstable,jitjl
osesjusefulnessjasjthejstandardjforjmeasuringjfinancialjtransactions.
1-12.
No.j Therejisjajproblemjwithjdeterminingjthejindexjinjorderjtojadjustjthejstateme
nts.j Thejitemsjthatjarejincludedjinjthejindexjmustjbejrepresentative.jInjaddition,jt
hejpricesjofjitemsjchangejbecausejofjvariousjfactors,jsuchjasjquality,jtechnolog
y,jandjinflation.
Yes.jAjreasonablejadjustmentjtojthejstatementsjcanjbejmadejforjinflation.
1-13. False.j Anjarbitraryjwrite-
offjofjinventoryjcannotjbejjustifiedjunderjthejconservatismjconcept.j Thejconserv
atismjconceptjcanjonlyjbejappliedjwherejtherejarejalternativejmeasurementsjan
djeachjofjthesejalternativejmeasurementsjhasjreasonablejsupport.
1-14.
2
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.
, Yes,jinventoryjthatjhasjajmarketjvaluejbelowjthejhistoricaljcostjshouldjbejwritt
enjdownjinjorderjtojrecognizejajloss.j Thisjisjdonejbasedjuponjthejconceptjofjco
nservatism.j Lossesjthatjcanjbejreasonablyjanticipatedjshouldjbejtakenjinjorde
rjtojreflectjthejleastjfavorablejeffectjonjnetjincomejofjthejcurrentjperiod.
3
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.
, 1-15. Endjofjproduction
Thejrealizationjofjrevenuejatjthejcompletionjofjthejproductionjprocessjisjacceptabl
ejwhenjthejpricejofjthejitemjisjknownjandjtherejisjajreadyjmarket.
Receiptjofjcash
Thisjmethodjshouldjonlyjbejusedjwhenjthejprospectsjofjcollectionjarejespeciallyj
doubtfuljatjthejtimejofjsale.
Duringjproduction
Thisjmethodjisjallowedjforjlong-
termjconstructionjprojectsjbecausejrecognizingjrevenuejonjlong-
termjconstructionjprojectsjasjworkjprogressesjtendsjtojgivejajfairerjpicturejofjthe
jresultsjforjajgivenjperiodjinjcomparisonjwithjhavingjthejentirejrevenuejrealizedji
njonejperiodjofjtime.
1-16.
Itjisjdifficultjtojapplyjthejmatchingjconceptjwhenjtherejisjnojdirectjconnectionjbet
weenjthejcostjandjrevenue.j Underjthesejcircumstances,jaccountantsjoftenjchar
gejoffjthejcostjinjthejperiodjincurredjinjorderjtojbejconservative.
1-17.
Ifjthejentityjcanjjustifyjthejusejofjanjalternativejaccountingjmethodjonjthejbas
isjthatjitjisjrational,jthenjthejchangejcanjbejmade.
1-18.
Thejaccountingjreportsjmustjdisclosejalljfactsjthatjmayjinfluencejthejjudgmentjo
fjanjinformedjreader.j Usuallyjthisjisjajjudgmentjdecisionjforjthejaccountantjtojma
ke.j Becausejofjthejcomplexityjofjmanyjbusinessesjandjthejincreasedjexpectatio
nsjofjthejpublic,jthejfulljdisclosurejconceptjhasjbecomejonejofjthejmostjdifficultjc
onceptsjforjthejaccountantjtojapply.
1-19.
Therejisjajpreferencejforjthejusejofjobjectivityjinjthejpreparationjofjfinancialjstat
ements,jbutjfinancialjstatementsjcannotjbejcompletelyjpreparedjbasedjuponjo
bjectivejdata;jestimatesjmustjbejmadejinjmanyjsituations.
1-20.
Thisjisjajtruejstatement.j Thejconceptjofjmaterialityjallowsjthejaccountantjtojha
ndlejimmaterialjitemsjinjthejmostjeconomicaljandjexpedientjmannerjpossible.
1-21.
Somejindustryjpracticesjleadjtojaccountingjreportsjthatjdojnotjconformjtojgenera
llyjacceptedjaccountingjprinciples.j Thesejreportsjarejconsideredjtojbejacceptabl
e,jbutjthejaccountingjprofessionjisjmakingjanjeffortjtojeliminatejparticularjindustry
4
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.
jtojFinancialjReporting
QUESTIONS
1- 1. a.
ThejAICPAjisjanjorganizationjofjCPAsjthatjpriorjtoj1973jacceptedjthejprim
aryjresponsibilityjforjthejdevelopmentjofjgenerallyjacceptedjaccountingjprin
ciples.jTheirjrolejwasjsubstantiallyjreducedjinj1973jwhenjthejFinancialjAcco
untingjStandardsjBoardjwasjestablished.j Theirjrolejwasjfurtherjreducedjwit
hjthejestablishmentjofjthejPublicjCompanyjAccountingjOversightjBoardjwa
sjestablishedjinj2002.
b. ThejFinancialjAccountingjStandardsjBoardjreplacedjthejAccountingjPr
inciplesjBoardjasjthejprimaryjrule-
makingjbodyjforjaccountingjstandards.jItjisjanjindependentjorganizatio
njandjincludesjmembersjotherjthanjpublicjaccountants.
c. ThejSECjhasjthejauthorityjtojdeterminejgenerallyjacceptedjaccountingjpri
nciplesjandjtojregulatejthejaccountingjprofession.jThejSECjhasjelectedjtoj
leavejmuchjofjthejdeterminationjofjgenerallyjacceptedjaccountingjprincipl
esjtojthejprivatejsector.j ThejFinancialjAccountingjStandardsjBoardjhasjpl
ayedjthejmajorjrolejinjestablishingjaccountingjstandardsjsincej1973.j Reg
ulationjofjthejaccountingjprofessionjwasjsubstantiallyjturnedjoverjtojthejP
ublicjCompanyjAccountingjOversightjBoardjinj2002.
1-j2.
Consistencyjisjobtainedjthroughjthejapplicationjofjthejsamejaccountingjpri
nciplejfromjperiodjtojperiod.j Ajchangejinjprinciplejrequiresjstatementjdisclo
sure.
1-j3.
Thejconceptjofjhistoricaljcostjdeterminesjthejbalancejsheetjvaluationjofjland.jThe
jrealizationjconceptjrequiresjthatjajtransactionjneedsjtojoccurjforjthejprofitjtojbejre
cognized.
1-j4. a.j Entity e.j Historicaljcost
b. Realization f.j Historicaljcost
c. Materiality g.j Disclosure
d. Conservatism
1-j5. Entityjconcept
1
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.
,1-j6.
Generallyjacceptedjaccountingjprinciplesjdojnotjapplyjwhenjajfirmjdoesjnotjap
pearjtojbejajgoingjconcern.j Ifjthejdecisionjisjmadejthatjthisjisjnotjajgoingjconcern
,jthenjthejusejofjGAAPjwouldjnotjbejappropriate.
1-j7.
Withjthejtimejperiodjassumption,jinaccuraciesjofjaccountingjforjthejentity,jshortj
ofjitsjcompletejlifejspan,jarejaccepted.jThejassumptionjisjmadejthatjthejentityjcanj
bejaccountedjforjreasonablyjaccuratelyjforjajparticularjperiodjofjtime.j Injotherjwo
rds,jthejdecisionjisjmadejtojacceptjsomejinaccuracyjbecausejofjincompletejinfor
mationjaboutjthejfuturejinjexchangejforjmorejtimelyjreporting.j Thejstatementsjar
ejconsideredjtojbejmeaningfuljbecausejmaterialjinaccuraciesjarejnotjacceptable.
1- 8.j j Itjisjtruejthatjthejonlyjaccuratejwayjtojaccountjforjthejsuccessjorjfailurejofjanjentityjisj
tojaccumulatejalljtransactionsjfromjthejopeningjofjbusinessjuntiljthejbusinessjev
entuallyjliquidates.j Butjitjisjnotjnecessaryjthatjthejstatementsjbejcompletelyjacc
uratejinjorderjforjthemjtojbejmeaningful.
1- 9. a. Ajyearjthatjendsjwhenjoperationsjarejatjajlowjebbjforjthejyear.
b. ThejaccountingjtimejperiodjisjendedjonjDecemberj31.
c. Ajtwelve-
monthjaccountingjperiodjthatjendsjatjthejendjofjajmonthjotherjthanjDecem
berj31.
1-10. Money.
1-
11.j j Whenjmoneyjdoesjnotjholdjajstablejvalue,jthejfinancialjstatementsjcanjlos
ejmuchjofjtheirjsignificance.j Tojthejextentjthatjmoneyjdoesjnotjremainjstable,jitjl
osesjusefulnessjasjthejstandardjforjmeasuringjfinancialjtransactions.
1-12.
No.j Therejisjajproblemjwithjdeterminingjthejindexjinjorderjtojadjustjthejstateme
nts.j Thejitemsjthatjarejincludedjinjthejindexjmustjbejrepresentative.jInjaddition,jt
hejpricesjofjitemsjchangejbecausejofjvariousjfactors,jsuchjasjquality,jtechnolog
y,jandjinflation.
Yes.jAjreasonablejadjustmentjtojthejstatementsjcanjbejmadejforjinflation.
1-13. False.j Anjarbitraryjwrite-
offjofjinventoryjcannotjbejjustifiedjunderjthejconservatismjconcept.j Thejconserv
atismjconceptjcanjonlyjbejappliedjwherejtherejarejalternativejmeasurementsjan
djeachjofjthesejalternativejmeasurementsjhasjreasonablejsupport.
1-14.
2
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.
, Yes,jinventoryjthatjhasjajmarketjvaluejbelowjthejhistoricaljcostjshouldjbejwritt
enjdownjinjorderjtojrecognizejajloss.j Thisjisjdonejbasedjuponjthejconceptjofjco
nservatism.j Lossesjthatjcanjbejreasonablyjanticipatedjshouldjbejtakenjinjorde
rjtojreflectjthejleastjfavorablejeffectjonjnetjincomejofjthejcurrentjperiod.
3
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.
, 1-15. Endjofjproduction
Thejrealizationjofjrevenuejatjthejcompletionjofjthejproductionjprocessjisjacceptabl
ejwhenjthejpricejofjthejitemjisjknownjandjtherejisjajreadyjmarket.
Receiptjofjcash
Thisjmethodjshouldjonlyjbejusedjwhenjthejprospectsjofjcollectionjarejespeciallyj
doubtfuljatjthejtimejofjsale.
Duringjproduction
Thisjmethodjisjallowedjforjlong-
termjconstructionjprojectsjbecausejrecognizingjrevenuejonjlong-
termjconstructionjprojectsjasjworkjprogressesjtendsjtojgivejajfairerjpicturejofjthe
jresultsjforjajgivenjperiodjinjcomparisonjwithjhavingjthejentirejrevenuejrealizedji
njonejperiodjofjtime.
1-16.
Itjisjdifficultjtojapplyjthejmatchingjconceptjwhenjtherejisjnojdirectjconnectionjbet
weenjthejcostjandjrevenue.j Underjthesejcircumstances,jaccountantsjoftenjchar
gejoffjthejcostjinjthejperiodjincurredjinjorderjtojbejconservative.
1-17.
Ifjthejentityjcanjjustifyjthejusejofjanjalternativejaccountingjmethodjonjthejbas
isjthatjitjisjrational,jthenjthejchangejcanjbejmade.
1-18.
Thejaccountingjreportsjmustjdisclosejalljfactsjthatjmayjinfluencejthejjudgmentjo
fjanjinformedjreader.j Usuallyjthisjisjajjudgmentjdecisionjforjthejaccountantjtojma
ke.j Becausejofjthejcomplexityjofjmanyjbusinessesjandjthejincreasedjexpectatio
nsjofjthejpublic,jthejfulljdisclosurejconceptjhasjbecomejonejofjthejmostjdifficultjc
onceptsjforjthejaccountantjtojapply.
1-19.
Therejisjajpreferencejforjthejusejofjobjectivityjinjthejpreparationjofjfinancialjstat
ements,jbutjfinancialjstatementsjcannotjbejcompletelyjpreparedjbasedjuponjo
bjectivejdata;jestimatesjmustjbejmadejinjmanyjsituations.
1-20.
Thisjisjajtruejstatement.j Thejconceptjofjmaterialityjallowsjthejaccountantjtojha
ndlejimmaterialjitemsjinjthejmostjeconomicaljandjexpedientjmannerjpossible.
1-21.
Somejindustryjpracticesjleadjtojaccountingjreportsjthatjdojnotjconformjtojgenera
llyjacceptedjaccountingjprinciples.j Thesejreportsjarejconsideredjtojbejacceptabl
e,jbutjthejaccountingjprofessionjisjmakingjanjeffortjtojeliminatejparticularjindustry
4
©j2013jCengagejLearning.jAlljRightsjReserved.jThisjeditionjisjintendedjforjusejoutsidejofjthejU.S.jonly,jwithjcontentjthatjmayjbejdifferentjfromj
thejU.S.jEdition.jMayjnotjbejscanned,jcopied,jduplicated,jorjpostedjtojajpubliclyjaccessiblejwebsite,jinjwholejorjinjpart.
