1
,Chapter 1
h
Introduction to Financial Reporting h h h
QUESTIONS
1- 1.h a. The AICPA is an organization of CPAs that prior to 1973 accepted the
h h h h h h h h h h h h
primary responsibility for the development of generally accepted
h h h h h h h h
accounting principles. Their role was substantially reduced in 1973 when
h h h h h h h h h h
the Financial Accounting Standards Board was established. Their role
h h h h h h h h h
was further reduced with the establishment of the Public Company
h h h h h h h h h h
Accounting Oversight Board was established in 2002.
h h h h h h h
b. The Financial Accounting Standards Board replaced the Accounting Principles
h h h h h h h h
Board as the primary rule-making body for accounting standards. It is
h h h h h h h h h h h
an independent organization and includes members other than public
h h h h h h h h h
accountants.
h
c. The SEC has the authority to determine generally accepted accounting
h h h h h h h h h
principles and to regulate the accounting profession. The SEC has
h h h h h h h h h h
elected to leave much of the determination of generally accepted
h h h h h h h h h h
accounting principles to the private sector. The Financial Accounting
h h h h h h h h h
Standards Board has played the major role in establishing accounting
h h h h h h h h h h
standards since 1973. Regulation of the accounting profession was
h h h h h h h h h
substantially turned over to the Public Company Accounting Oversight
h h h h h h h h h
Board in 2002.
h h h
1- 2.h h h Consistency is obtained through the application of the same accounting
h h h h h h h h h
hprinciple from period to period. A change in principle requires statement
h h h h h h h h h h
hdisclosure.
1
,1- 3.
h The concept of historical cost determines the balance sheet valuation of land.
h h h h h h h h h h h
The realization concept requires that a transaction needs to occur for the profit
h h h h h h h h h h h h h
to be recognized.
h h h
1- 4.
h a. Entity
h e. Historical cost
h h
b. Realization f. Historical cost
h h
c. Materiality g. Disclosure
h
d. Conservatism
1- 5.
h Entity concept h
1- 6.
h h Generally accepted accounting principles do not apply when a firm does not
h h h h h h h h h h h
appear to be a going concern. If the decision is made that this is not a
h h h h h h h h h h h h h h h h
going concern, then the use of GAAP would not be appropriate.
h h h h h h h h h h h
1- 7.
h With the time period assumption, inaccuracies of accounting for the entity,
h h h h h h h h h h
short of its complete life span, are accepted. The assumption is made that the
h h h h h h h h h h h h h h
entity can be accounted for reasonably accurately for a particular period of
h h h h h h h h h h h h
time. In other words, the decision is made to accept some inaccuracy
h h h h h h h h h h h h
because of incomplete information about the future in exchange for more
h h h h h h h h h h h
timely reporting. The statements are considered to be meaningful because
h h h h h h h h h h
material inaccuracies are not acceptable.
h h h h h
1- 8. h h It is true that the only accurate way to account for the success or failure of an
h h h h h h h h h h h h h h h h
entity is to accumulate all transactions from the opening of business until the
h h h h h h h h h h h h h
business eventually liquidates. But it is not necessary that the statements
h h h h h h h h h h h
be completely accurate in order for them to be meaningful.
h h h h h h h h h h
2
, 1- 9. a. A year that ends when operations are at a low ebb for the year.
h h h h h h h h h h h h h
b. The accounting time period is ended on December 31.
h h h h h h h h
c. A twelve-month accounting period that ends at the end of a month other than
h h h h h h h h h h h h h
December 31. h h
1-10. Money.
1-11. When money does not hold a stable value, the financial statements can lose
h h h h h h h h h h h h
much of their significance. To the extent that money does not remain stable,
h h h h h h h h h h h h h
it loses usefulness as the standard for measuring financial transactions.
h h h h h h h h h h
1-12. No. There is a problem with determining the index in order to adjust the
h h h h h h h h h h h h h
statements. The items that are included in the index must be
h h h h h h h h h h h
representative. In addition, the prices of items change because of various
h h h h h h h h h h h
factors, such as quality, technology, and inflation.
h h h h h h h
Yes. A reasonable adjustment to the statements can be made for inflation.
h h h h h h h h h h h
1-13. False. An arbitrary write-off of inventory cannot be justified under the
h h h h h h h h h h
conservatism concept. The conservatism concept can only be applied
h h h h h h h h h
where there are alternative measurements and each of these alternative
h h h h h h h h h h
measurements has reasonable support.
h h h h
1-14. Yes, inventory that has a market value below the historical cost should be
h h h h h h h h h h h h
written down in order to recognize a loss. This is done based upon the
h h h h h h h h h h h h h h
concept of conservatism. Losses that can be reasonably anticipated should
h h h h h h h h h h
be taken in order to reflect the least favorable effect on net income of the
h h h h h h h h h h h h h h h
current period.
h h
3
,Chapter 1
h
Introduction to Financial Reporting h h h
QUESTIONS
1- 1.h a. The AICPA is an organization of CPAs that prior to 1973 accepted the
h h h h h h h h h h h h
primary responsibility for the development of generally accepted
h h h h h h h h
accounting principles. Their role was substantially reduced in 1973 when
h h h h h h h h h h
the Financial Accounting Standards Board was established. Their role
h h h h h h h h h
was further reduced with the establishment of the Public Company
h h h h h h h h h h
Accounting Oversight Board was established in 2002.
h h h h h h h
b. The Financial Accounting Standards Board replaced the Accounting Principles
h h h h h h h h
Board as the primary rule-making body for accounting standards. It is
h h h h h h h h h h h
an independent organization and includes members other than public
h h h h h h h h h
accountants.
h
c. The SEC has the authority to determine generally accepted accounting
h h h h h h h h h
principles and to regulate the accounting profession. The SEC has
h h h h h h h h h h
elected to leave much of the determination of generally accepted
h h h h h h h h h h
accounting principles to the private sector. The Financial Accounting
h h h h h h h h h
Standards Board has played the major role in establishing accounting
h h h h h h h h h h
standards since 1973. Regulation of the accounting profession was
h h h h h h h h h
substantially turned over to the Public Company Accounting Oversight
h h h h h h h h h
Board in 2002.
h h h
1- 2.h h h Consistency is obtained through the application of the same accounting
h h h h h h h h h
hprinciple from period to period. A change in principle requires statement
h h h h h h h h h h
hdisclosure.
1
,1- 3.
h The concept of historical cost determines the balance sheet valuation of land.
h h h h h h h h h h h
The realization concept requires that a transaction needs to occur for the profit
h h h h h h h h h h h h h
to be recognized.
h h h
1- 4.
h a. Entity
h e. Historical cost
h h
b. Realization f. Historical cost
h h
c. Materiality g. Disclosure
h
d. Conservatism
1- 5.
h Entity concept h
1- 6.
h h Generally accepted accounting principles do not apply when a firm does not
h h h h h h h h h h h
appear to be a going concern. If the decision is made that this is not a
h h h h h h h h h h h h h h h h
going concern, then the use of GAAP would not be appropriate.
h h h h h h h h h h h
1- 7.
h With the time period assumption, inaccuracies of accounting for the entity,
h h h h h h h h h h
short of its complete life span, are accepted. The assumption is made that the
h h h h h h h h h h h h h h
entity can be accounted for reasonably accurately for a particular period of
h h h h h h h h h h h h
time. In other words, the decision is made to accept some inaccuracy
h h h h h h h h h h h h
because of incomplete information about the future in exchange for more
h h h h h h h h h h h
timely reporting. The statements are considered to be meaningful because
h h h h h h h h h h
material inaccuracies are not acceptable.
h h h h h
1- 8. h h It is true that the only accurate way to account for the success or failure of an
h h h h h h h h h h h h h h h h
entity is to accumulate all transactions from the opening of business until the
h h h h h h h h h h h h h
business eventually liquidates. But it is not necessary that the statements
h h h h h h h h h h h
be completely accurate in order for them to be meaningful.
h h h h h h h h h h
2
, 1- 9. a. A year that ends when operations are at a low ebb for the year.
h h h h h h h h h h h h h
b. The accounting time period is ended on December 31.
h h h h h h h h
c. A twelve-month accounting period that ends at the end of a month other than
h h h h h h h h h h h h h
December 31. h h
1-10. Money.
1-11. When money does not hold a stable value, the financial statements can lose
h h h h h h h h h h h h
much of their significance. To the extent that money does not remain stable,
h h h h h h h h h h h h h
it loses usefulness as the standard for measuring financial transactions.
h h h h h h h h h h
1-12. No. There is a problem with determining the index in order to adjust the
h h h h h h h h h h h h h
statements. The items that are included in the index must be
h h h h h h h h h h h
representative. In addition, the prices of items change because of various
h h h h h h h h h h h
factors, such as quality, technology, and inflation.
h h h h h h h
Yes. A reasonable adjustment to the statements can be made for inflation.
h h h h h h h h h h h
1-13. False. An arbitrary write-off of inventory cannot be justified under the
h h h h h h h h h h
conservatism concept. The conservatism concept can only be applied
h h h h h h h h h
where there are alternative measurements and each of these alternative
h h h h h h h h h h
measurements has reasonable support.
h h h h
1-14. Yes, inventory that has a market value below the historical cost should be
h h h h h h h h h h h h
written down in order to recognize a loss. This is done based upon the
h h h h h h h h h h h h h h
concept of conservatism. Losses that can be reasonably anticipated should
h h h h h h h h h h
be taken in order to reflect the least favorable effect on net income of the
h h h h h h h h h h h h h h h
current period.
h h
3