SolutionlManuallForlFinanciallStatementlAnalysis,
13th Edition
l
BylCharleslH.lGibson,lVerifiedlChapter'sl1l-l13l|lCompletel
, Chapterl1l Introductio
nltolFinanciallReporting
QUESTIONS
1- 1. a.
ThelAICPAlislanlorganizationloflCPAslthatlpriorltol1973lacceptedlthelprim
arylresponsibilitylforltheldevelopmentloflgenerallylacceptedlaccountinglpri
nciples.lTheirlrolelwaslsubstantiallylreducedlinl1973lwhenlthelFinanciallAc
countinglStandardslBoardlwaslestablished.l Theirlrolelwaslfurtherlreducedl
withlthelestablishmentloflthelPubliclCompanylAccountinglOversightlBoardl
waslestablishedlinl2002.
b. ThelFinanciallAccountinglStandardslBoardlreplacedlthelAccountinglP
rincipleslBoardlaslthelprimarylrule-
makinglbodylforlaccountinglstandards.lItlislanlindependentlorganizati
onlandlincludeslmemberslotherlthanlpubliclaccountants.
c. ThelSEClhaslthelauthorityltoldeterminelgenerallylacceptedlaccountinglpri
ncipleslandltolregulatelthelaccountinglprofession.lThelSEClhaslelectedlto
lleavelmuchlofltheldeterminationloflgenerallylacceptedlaccountinglprincip
lesltolthelprivatelsector.l ThelFinanciallAccountinglStandardslBoardlhaslp
layedlthelmajorlrolelinlestablishinglaccountinglstandardslsincel1973.l Re
gulationloflthelaccountinglprofessionlwaslsubstantiallylturnedloverltolthel
PubliclCompanylAccountinglOversightlBoardlinl2002.
1-l2.
Consistencylislobtainedlthroughlthelapplicationloflthelsamelaccountinglpri
nciplelfromlperiodltolperiod.l Alchangelinlprinciplelrequireslstatementldiscl
osure.
1-l3.
Thelconceptloflhistoricallcostldetermineslthelbalancelsheetlvaluationloflland.lThe
lrealizationlconceptlrequireslthatlaltransactionlneedsltoloccurlforlthelprofitltolbelre
cognized.
1-l4. a.l Entity e.l Historicallcost
b. Realization f.l Historicallcost
c. Materiality g.l Disclosure
d. Conservatism
1-l5. Entitylconcept
,1-l6.
Generallylacceptedlaccountinglprinciplesldolnotlapplylwhenlalfirmldoeslnotlap
pearltolbelalgoinglconcern.l Ifltheldecisionlislmadelthatlthislislnotlalgoinglconcer
n,lthenltheluseloflGAAPlwouldlnotlbelappropriate.
1-l7.
Withltheltimelperiodlassumption,linaccuraciesloflaccountinglforlthelentity,lshortl
oflitslcompletellifelspan,larelaccepted.lThelassumptionlislmadelthatlthelentitylca
nlbelaccountedlforlreasonablylaccuratelylforlalparticularlperiodlofltime.l Inlotherl
words,ltheldecisionlislmadeltolacceptlsomelinaccuracylbecauseloflincompletelin
formationlaboutlthelfuturelinlexchangelforlmoreltimelylreporting.l Thelstatements
larelconsideredltolbelmeaningfullbecauselmateriallinaccuracieslarelnotlaccepta
ble.
1- 8.l l Itlisltruelthatlthelonlylaccuratelwayltolaccountlforlthelsuccesslorlfailureloflanlentityli
sltolaccumulatelallltransactionslfromlthelopeningloflbusinessluntillthelbusinessl
eventuallylliquidates.l Butlitlislnotlnecessarylthatlthelstatementslbelcompletelyla
ccuratelinlorderlforlthemltolbelmeaningful.
1- 9. a. Alyearlthatlendslwhenloperationslarelatlallowlebblforlthelyear.
b. ThelaccountingltimelperiodlislendedlonlDecemberl31.
c. Altwelve-
monthlaccountinglperiodlthatlendslatlthelendloflalmonthlotherlthanlDecem
berl31.
1-10. Money.
1-
11.l l Whenlmoneyldoeslnotlholdlalstablelvalue,lthelfinanciallstatementslcanllos
elmuchlofltheirlsignificance.l Tolthelextentlthatlmoneyldoeslnotlremainlstable,litll
oseslusefulnesslaslthelstandardlforlmeasuringlfinancialltransactions.
1-12.
No.l Therelislalproblemlwithldetermininglthelindexlinlorderltoladjustlthelstateme
nts.l Thelitemslthatlarelincludedlinlthelindexlmustlbelrepresentative.lInladdition,l
thelpricesloflitemslchangelbecauseloflvariouslfactors,lsuchlaslquality,ltechnolo
gy,landlinflation.
Yes.lAlreasonableladjustmentltolthelstatementslcanlbelmadelforlinflation.
1-13. False.l Anlarbitrarylwrite-
offloflinventorylcannotlbeljustifiedlunderlthelconservatismlconcept.l Thelconser
vatismlconceptlcanlonlylbelappliedlwhereltherelarelalternativelmeasurementsla
ndleachlofltheselalternativelmeasurementslhaslreasonablelsupport.
, 1-14.
Yes,linventorylthatlhaslalmarketlvaluelbelowlthelhistoricallcostlshouldlbelwritt
enldownlinlorderltolrecognizelalloss.l Thislisldonelbasedluponlthelconceptloflco
nservatism.l Losseslthatlcanlbelreasonablylanticipatedlshouldlbeltakenlinlorde
rltolreflectlthelleastlfavorableleffectlonlnetlincomeloflthelcurrentlperiod.
13th Edition
l
BylCharleslH.lGibson,lVerifiedlChapter'sl1l-l13l|lCompletel
, Chapterl1l Introductio
nltolFinanciallReporting
QUESTIONS
1- 1. a.
ThelAICPAlislanlorganizationloflCPAslthatlpriorltol1973lacceptedlthelprim
arylresponsibilitylforltheldevelopmentloflgenerallylacceptedlaccountinglpri
nciples.lTheirlrolelwaslsubstantiallylreducedlinl1973lwhenlthelFinanciallAc
countinglStandardslBoardlwaslestablished.l Theirlrolelwaslfurtherlreducedl
withlthelestablishmentloflthelPubliclCompanylAccountinglOversightlBoardl
waslestablishedlinl2002.
b. ThelFinanciallAccountinglStandardslBoardlreplacedlthelAccountinglP
rincipleslBoardlaslthelprimarylrule-
makinglbodylforlaccountinglstandards.lItlislanlindependentlorganizati
onlandlincludeslmemberslotherlthanlpubliclaccountants.
c. ThelSEClhaslthelauthorityltoldeterminelgenerallylacceptedlaccountinglpri
ncipleslandltolregulatelthelaccountinglprofession.lThelSEClhaslelectedlto
lleavelmuchlofltheldeterminationloflgenerallylacceptedlaccountinglprincip
lesltolthelprivatelsector.l ThelFinanciallAccountinglStandardslBoardlhaslp
layedlthelmajorlrolelinlestablishinglaccountinglstandardslsincel1973.l Re
gulationloflthelaccountinglprofessionlwaslsubstantiallylturnedloverltolthel
PubliclCompanylAccountinglOversightlBoardlinl2002.
1-l2.
Consistencylislobtainedlthroughlthelapplicationloflthelsamelaccountinglpri
nciplelfromlperiodltolperiod.l Alchangelinlprinciplelrequireslstatementldiscl
osure.
1-l3.
Thelconceptloflhistoricallcostldetermineslthelbalancelsheetlvaluationloflland.lThe
lrealizationlconceptlrequireslthatlaltransactionlneedsltoloccurlforlthelprofitltolbelre
cognized.
1-l4. a.l Entity e.l Historicallcost
b. Realization f.l Historicallcost
c. Materiality g.l Disclosure
d. Conservatism
1-l5. Entitylconcept
,1-l6.
Generallylacceptedlaccountinglprinciplesldolnotlapplylwhenlalfirmldoeslnotlap
pearltolbelalgoinglconcern.l Ifltheldecisionlislmadelthatlthislislnotlalgoinglconcer
n,lthenltheluseloflGAAPlwouldlnotlbelappropriate.
1-l7.
Withltheltimelperiodlassumption,linaccuraciesloflaccountinglforlthelentity,lshortl
oflitslcompletellifelspan,larelaccepted.lThelassumptionlislmadelthatlthelentitylca
nlbelaccountedlforlreasonablylaccuratelylforlalparticularlperiodlofltime.l Inlotherl
words,ltheldecisionlislmadeltolacceptlsomelinaccuracylbecauseloflincompletelin
formationlaboutlthelfuturelinlexchangelforlmoreltimelylreporting.l Thelstatements
larelconsideredltolbelmeaningfullbecauselmateriallinaccuracieslarelnotlaccepta
ble.
1- 8.l l Itlisltruelthatlthelonlylaccuratelwayltolaccountlforlthelsuccesslorlfailureloflanlentityli
sltolaccumulatelallltransactionslfromlthelopeningloflbusinessluntillthelbusinessl
eventuallylliquidates.l Butlitlislnotlnecessarylthatlthelstatementslbelcompletelyla
ccuratelinlorderlforlthemltolbelmeaningful.
1- 9. a. Alyearlthatlendslwhenloperationslarelatlallowlebblforlthelyear.
b. ThelaccountingltimelperiodlislendedlonlDecemberl31.
c. Altwelve-
monthlaccountinglperiodlthatlendslatlthelendloflalmonthlotherlthanlDecem
berl31.
1-10. Money.
1-
11.l l Whenlmoneyldoeslnotlholdlalstablelvalue,lthelfinanciallstatementslcanllos
elmuchlofltheirlsignificance.l Tolthelextentlthatlmoneyldoeslnotlremainlstable,litll
oseslusefulnesslaslthelstandardlforlmeasuringlfinancialltransactions.
1-12.
No.l Therelislalproblemlwithldetermininglthelindexlinlorderltoladjustlthelstateme
nts.l Thelitemslthatlarelincludedlinlthelindexlmustlbelrepresentative.lInladdition,l
thelpricesloflitemslchangelbecauseloflvariouslfactors,lsuchlaslquality,ltechnolo
gy,landlinflation.
Yes.lAlreasonableladjustmentltolthelstatementslcanlbelmadelforlinflation.
1-13. False.l Anlarbitrarylwrite-
offloflinventorylcannotlbeljustifiedlunderlthelconservatismlconcept.l Thelconser
vatismlconceptlcanlonlylbelappliedlwhereltherelarelalternativelmeasurementsla
ndleachlofltheselalternativelmeasurementslhaslreasonablelsupport.
, 1-14.
Yes,linventorylthatlhaslalmarketlvaluelbelowlthelhistoricallcostlshouldlbelwritt
enldownlinlorderltolrecognizelalloss.l Thislisldonelbasedluponlthelconceptloflco
nservatism.l Losseslthatlcanlbelreasonablylanticipatedlshouldlbeltakenlinlorde
rltolreflectlthelleastlfavorableleffectlonlnetlincomeloflthelcurrentlperiod.
