Solution Manual For Financial Statement Analysis,
13th Edition
By Charles H. Gibson, Verified Chapter's - 3 | Complete
A A
, Chapter Introductio n
A
to Financial Reporting
QUESTIONS
1- .
A a.
The AICPA is an organization of CPAs that prior to 973 accepted the p
A
rimary responsibility for the development of generally accepted accountin
g principles. Their role was substantially reduced in 973 when the Finan
A
cial Accounting Standards Board was established. Their role was further
reduced with the establishment of the Public Company Accounting Overs
ight 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 organiza
tion 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 elec
ted to leave much of the determination of generally accepted accountin
g principles to the private sector. The Financial Accounting Standards
Board has played the major role in establishing accounting standards si
nce 973. Regulation of the accounting profession was substantially tur
A
ned over to the Public Company Accounting OversightsBoard 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 costsdetermines 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- 6.
Generally accepted accounting principles do not apply when a firm does not
appear to be a going concern. If the decision is made that this is not a going
concern, then the use of GAAP would notsbe appropriate.
1- 7.
With the time period assumption, inaccuracies of accounting for the entity, sho
rt of its complete life span, are accepted. The assumption is made that the entit
y can be accounted for reasonably accurately for a particular period of time. In
other words, the decision is made to accept some inaccuracy because of inco
mplete information about the future in exchange for more timely reporting. The
statements are considered to be meaningful because material inaccuracies ar
e not acceptable.
1- 8. It is true that the only accurate way to account for the success or failure of an en
tity is to accumulate all transactions from the opening of business until the bu
siness eventually liquidates. Butsitsis not necessary that the statements be co
mpletely accurate in order for them to be meaningful.
1- 9. a. Asyear that ends when operations are at a low ebb for the year.
b. The accounting time period is ended on December 31.
c. Astwelve-
month accounting period that ends at the end of a month other than Dec
ember 31.
1-10. Money.
1-
11. When money does notshold a stable value, the financial statements can
lose much of their significance. To the extentsthatsmoney does not remain st
able, it loses usefulness as the standard for measuring financial transactions.
1-12.
No. There is a problem with determining the indexsin order to adjust the state
ments. The items that are included in the index must be representative. In ad
dition, the prices of items change because of various factors, such as quality,
technology, and inflation.
Yes. A reasonable adjustment to the statements can be made for inflation.
1-13. False. An arbitrary write-
off of inventory cannot be justified under the conservatism concept. The cons
ervatism concept can only be applied where there are alternative measureme
nts and each of these alternative measurements has reasonable support.
, 1-14.
Yes, inventory that has a market value below the historical cost should be wr
itten down in order to recognize a loss. This is done based upon the concept
of conservatism. Losses that can be reasonably anticipated should be take
n in order to reflectsthe leastsfavorable effect on netsincome of the current pe
riod.
13th Edition
By Charles H. Gibson, Verified Chapter's - 3 | Complete
A A
, Chapter Introductio n
A
to Financial Reporting
QUESTIONS
1- .
A a.
The AICPA is an organization of CPAs that prior to 973 accepted the p
A
rimary responsibility for the development of generally accepted accountin
g principles. Their role was substantially reduced in 973 when the Finan
A
cial Accounting Standards Board was established. Their role was further
reduced with the establishment of the Public Company Accounting Overs
ight 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 organiza
tion 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 elec
ted to leave much of the determination of generally accepted accountin
g principles to the private sector. The Financial Accounting Standards
Board has played the major role in establishing accounting standards si
nce 973. Regulation of the accounting profession was substantially tur
A
ned over to the Public Company Accounting OversightsBoard 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 costsdetermines 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- 6.
Generally accepted accounting principles do not apply when a firm does not
appear to be a going concern. If the decision is made that this is not a going
concern, then the use of GAAP would notsbe appropriate.
1- 7.
With the time period assumption, inaccuracies of accounting for the entity, sho
rt of its complete life span, are accepted. The assumption is made that the entit
y can be accounted for reasonably accurately for a particular period of time. In
other words, the decision is made to accept some inaccuracy because of inco
mplete information about the future in exchange for more timely reporting. The
statements are considered to be meaningful because material inaccuracies ar
e not acceptable.
1- 8. It is true that the only accurate way to account for the success or failure of an en
tity is to accumulate all transactions from the opening of business until the bu
siness eventually liquidates. Butsitsis not necessary that the statements be co
mpletely accurate in order for them to be meaningful.
1- 9. a. Asyear that ends when operations are at a low ebb for the year.
b. The accounting time period is ended on December 31.
c. Astwelve-
month accounting period that ends at the end of a month other than Dec
ember 31.
1-10. Money.
1-
11. When money does notshold a stable value, the financial statements can
lose much of their significance. To the extentsthatsmoney does not remain st
able, it loses usefulness as the standard for measuring financial transactions.
1-12.
No. There is a problem with determining the indexsin order to adjust the state
ments. The items that are included in the index must be representative. In ad
dition, the prices of items change because of various factors, such as quality,
technology, and inflation.
Yes. A reasonable adjustment to the statements can be made for inflation.
1-13. False. An arbitrary write-
off of inventory cannot be justified under the conservatism concept. The cons
ervatism concept can only be applied where there are alternative measureme
nts and each of these alternative measurements has reasonable support.
, 1-14.
Yes, inventory that has a market value below the historical cost should be wr
itten down in order to recognize a loss. This is done based upon the concept
of conservatism. Losses that can be reasonably anticipated should be take
n in order to reflectsthe leastsfavorable effect on netsincome of the current pe
riod.
