Financial Reporting and Analysis ED13 Charles H. Gibson-|Instructors manual| Reviewed/Updated for 2021

1

,Chapter 1
b




Introduction to Financial Reporting b b b




QUESTIONS


1- 1.b 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 the
b b b b b b b b b b b




Financial Accounting Standards Board was established. Their role was
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 Principles
b b b b b b b b




Board as the primary rule-making body for accounting standards. It is an
b b b b b b b b b b b b




independent organization and includes members other than public
b b b b b b b b




accountants.
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 b 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

,1- 3.
b The concept of historical cost determines the balance sheet valuation of land.
b b b b b b b b b b b




The realization concept requires that a transaction needs to occur for the profit to
b b b b b b b b b b b b b b




be recognized.
b 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. Generally accepted accounting principles do not apply when a firm does not appear
b b b b b b b b b b b b b b




to be a going concern. If the decision is made that this is not a going concern,
b b b b b b b b b b b b b b b b b




then the use of GAAP would not be appropriate.
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. It is true that the only accurate way to account for the success or failure of an entity is
b b b b b b b b b b b b b b b b b b b b




to accumulate all transactions from the opening of business until the business
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




2

, 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 than
b b b b b b b b b b b b b




December 31.
b b




1-10. Money.



1-11. 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
b b b b b b b b b b b b b b




concept of conservatism. Losses that can be reasonably anticipated should be
b b b b b b b b b b b




taken in order to reflect the least favorable effect on net income of the current
b b b b b b b b b b b b b b b




period.
b




3