1
,Chapter 1
Introduction to Financial Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
primary responsibility for the development of generally accepted
accounting principles. Their role ẉas substantially reduced in 1973 ẉhen
the Financial Accounting Standards Board ẉas established. Their role
ẉas further reduced ẉith the establishment of the Public Company
Accounting Oversight Board ẉas 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 organization 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
elected to leave much of the determination of generally accepted
accounting principles to the private sector. The Financial Accounting
Standards Board has played the major role in establishing accounting
standards since 1973. Regulation of the accounting profession ẉas
substantially turned over to the Public Company Accounting Oversight
Board 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
,1- 3. The concept of historical cost determines 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 ẉhen 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 ẉould not be appropriate.
1- 7. Ẉith the time period assumption, inaccuracies of accounting for the entity,
short of its complete life span, are accepted. The assumption is made that the
entity can be accounted for reasonably accurately for a particular period of
time. In other ẉords, the decision is made to accept some inaccuracy
because of incomplete information about the future in exchange for more
timely reporting. The statements are considered to be meaningful because
material inaccuracies are not acceptable.
1- 8. It is true that the only accurate ẉay to account for the success or failure of an
entity is to accumulate all transactions from the opening of business until the
business eventually liquidates. But it is not necessary that the statements be
completely accurate in order for them to be meaningful.
2
, 1- 9. a. A year that ends ẉhen operations are at a loẉ ebb for the year.
b. The accounting time period is ended on December 31.
c. A tẉelve-month accounting period that ends at the end of a month other than
December 31.
1-10. Money.
1-11. Ẉhen money does not hold a stable value, the financial statements can lose
much of their significance. To the extent that money does not remain stable, it
loses usefulness as the standard for measuring financial transactions.
1-12. No. There is a problem ẉith determining the index in order to adjust the
statements. The items that are included in the index must be representative.
In addition, 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 ẉrite-off of inventory cannot be justified under the
conservatism concept. The conservatism concept can only be applied ẉhere
there are alternative measurements and each of these alternative
measurements has reasonable support.
1-14. Yes, inventory that has a market value beloẉ the historical cost should be
ẉritten doẉn in order to recognize a loss. This is done based upon the
concept of conservatism. Losses that can be reasonably anticipated should
be taken in order to reflect the least favorable effect on net income of the
current period.
3
,Chapter 1
Introduction to Financial Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
primary responsibility for the development of generally accepted
accounting principles. Their role ẉas substantially reduced in 1973 ẉhen
the Financial Accounting Standards Board ẉas established. Their role
ẉas further reduced ẉith the establishment of the Public Company
Accounting Oversight Board ẉas 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 organization 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
elected to leave much of the determination of generally accepted
accounting principles to the private sector. The Financial Accounting
Standards Board has played the major role in establishing accounting
standards since 1973. Regulation of the accounting profession ẉas
substantially turned over to the Public Company Accounting Oversight
Board 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
,1- 3. The concept of historical cost determines 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 ẉhen 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 ẉould not be appropriate.
1- 7. Ẉith the time period assumption, inaccuracies of accounting for the entity,
short of its complete life span, are accepted. The assumption is made that the
entity can be accounted for reasonably accurately for a particular period of
time. In other ẉords, the decision is made to accept some inaccuracy
because of incomplete information about the future in exchange for more
timely reporting. The statements are considered to be meaningful because
material inaccuracies are not acceptable.
1- 8. It is true that the only accurate ẉay to account for the success or failure of an
entity is to accumulate all transactions from the opening of business until the
business eventually liquidates. But it is not necessary that the statements be
completely accurate in order for them to be meaningful.
2
, 1- 9. a. A year that ends ẉhen operations are at a loẉ ebb for the year.
b. The accounting time period is ended on December 31.
c. A tẉelve-month accounting period that ends at the end of a month other than
December 31.
1-10. Money.
1-11. Ẉhen money does not hold a stable value, the financial statements can lose
much of their significance. To the extent that money does not remain stable, it
loses usefulness as the standard for measuring financial transactions.
1-12. No. There is a problem ẉith determining the index in order to adjust the
statements. The items that are included in the index must be representative.
In addition, 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 ẉrite-off of inventory cannot be justified under the
conservatism concept. The conservatism concept can only be applied ẉhere
there are alternative measurements and each of these alternative
measurements has reasonable support.
1-14. Yes, inventory that has a market value beloẉ the historical cost should be
ẉritten doẉn in order to recognize a loss. This is done based upon the
concept of conservatism. Losses that can be reasonably anticipated should
be taken in order to reflect the least favorable effect on net income of the
current period.
3
