Financial Reporting and Analysis: Using Financial Accounting Information

Charles H. Gibson

Chapter 1 Introduction to Financial Reporting - all with Video Answers

Educators

Chapter Questions

Problem 1

Discuss the role of each of the following in the formulation of accounting principles:
a. American Institute of Certified Public Accountants
b. Financial Accounting Standards Board
c. Securities and Exchange Commission

Puneet Prajapati

Numerade Educator

Problem 2

How does the concept of consistency aid in the analysis of financial statements? What type of accounting disclosure is required if this concept is not applied?

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Problem 3

The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said, "A year ago we bought a piece of land for $$\$ 100,000$$. This year, inflation has driven prices up by $6 \%$, and an appraiser just told us we could easily resell the land for $$\$ 115,000$$. Yet our balance sheet still shows it at $$\$ 100,000$$. It should be valued at $$\$ 115,000$$. That's what it's worth. Or, at a minimum, at $$\$ 106,000$$." Respond to this statement with specific reference to the accounting principles applicable in this situation.

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Problem 4

Identify the accounting principle(s) applicable to each of the following situations:
a. Tim Roberts owns a bar and a rental apartment and operates a consulting service. He has separate financial statements for each.
b. An advance collection for magazine subscriptions is reported as a liability titled Unearned Subscriptions.
c. Purchases for office or store equipment for less than $$\$ 25$$ are entered in Miscellaneous Expense.
d. A company uses the lower of cost or market for valuation of its inventory.
e. Partially completed television sets are carried at the sum of the cost incurred to date.
f. Land purchased 15 years ago for $$\$ 40,500$$ is now worth $$\$ 346,000$$. It is still carried on the books at $$\$ 40,500$$.
g. Zero Corporation is being sued for $$\$ 1$$ million for breach of contract. Its lawyers believe that the damages will be minimal. Zero reports the possible loss in a note.

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01:54

Problem 5

A corporation like General Electric has many owners (stockholders). Which concept enables the accountant to account for transactions of General Electric separate and distinct from the personal transactions of the owners of General Electric?

Natalie Britton

Numerade Educator

01:30

Problem 6

Zebra Company has incurred substantial financial losses in recent years. Because of its financial condition, the ability of the company to keep operating is in question. Management prepares a set of financial statements that conform to generally accepted accounting principles. Comment on the use of GAAP under these conditions.

Oluwadamilola Ameobi

Numerade Educator

00:03

Problem 7

Because of assumptions and estimates that go into the preparation of financial statements, the statements are inaccurate and are, therefore, not a very meaningful tool to determine the profits or losses of an entity or the financial position of an entity. Comment.

Oluwadamilola Ameobi

Numerade Educator

Problem 8

The only accurate way 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. Comment on whether this is true. Discuss the necessity of having completely accurate statements.

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06:01

Problem 9

Describe the following terms, which indicate the period of time included in the financial statements:
a. Natural business year
b. Calendar year
c. Fiscal year

Puneet Prajapati

Numerade Educator

Problem 10

Which standard of measure is the best for measuring financial transactions?

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03:19

Problem 11

Countries have had problems with the stability of their money. Briefly describe the problem caused for financial statements when money does not hold a stable value.

Md.Daniyal Arshad

Numerade Educator

01:31

Problem 12

In some countries where inflation has been material, an effort has been made to retain the significance of money as a measuring unit by adjusting the financial statements by an inflation factor. Can an accurate adjustment for inflation be made to the statements? Can a reasonable adjustment to the statements be made? Discuss.

Rashmi Sinha

Numerade Educator

03:04

Problem 13

An arbitrary write-off of inventory can be justified under the conservatism concept. Is this statement true or false? Discuss.

Md.Daniyal Arshad

Numerade Educator

Problem 14

Inventory that has a market value below the historical cost should be written down in order to recognize a loss. Comment.

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Problem 15

There are other acceptable methods of recognizing revenue when the point of sale is not acceptable. List and discuss the other methods reviewed in this chapter, and indicate when they can be used.

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Problem 16

The matching concept involves the determination of when to recognize the costs associated with the revenue that is being recognized. For some costs, such as administrative costs, the matching concept is difficult to apply. Comment on when it is difficult to apply the matching concept. What do accountants often do under these circumstances?

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Problem 17

The consistency concept requires the entity to give the same treatment to comparable transactions from period to period. Under what circumstances can an entity change its accounting methods, provided it makes full disclosure?

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Problem 18

Discuss why the concept of full disclosure is difficult to apply.

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01:34

Problem 19

No estimate or subjectivity is allowed in the preparation of financial statements. Discuss.

Ameer Said

Numerade Educator

Problem 20

It is proper to handle immaterial items in the most economical, expedient manner possible. In other words, generally accepted accounting principles do not apply. Comment, including a concept that justifies your answer.

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Problem 21

The same generally accepted accounting principles apply to all companies. Comment.

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02:37

Problem 22

Many important events that influence the prospect for the entity are not recorded in the financial records. Comment and give an example.

Ameer Said

Numerade Educator

Problem 23

Some industry practices lead to accounting reports that do not conform to the general theory that underlies accounting. Comment.

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Problem 24

An entity may choose between the use of the accrual basis of accounting and the cash basis. Comment.

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01:29

Problem 25

Why did the FASB commence the Accounting Standards Codification ${ }^{T M}$ project?

Alexander Cheng

Numerade Educator

Problem 26

Would an accountant record the personal assets and liabilities of the owners in the accounts of the business? Explain.

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03:12

Problem 27

At which point is revenue from sales on account (credit sales) commonly recognized?

Oluwadamilola Ameobi

Numerade Educator

Problem 28

Elliott Company constructed a building at a cost of $$\$ 50,000$$. A local contractor had submitted a bid to construct it for $$\$ 60,000$$.
a. At what amount should the building be recorded?
b. Should revenue be recorded for the savings between the cost of $$\$ 50,000$$ and the bid of $$\$ 60,000$$?

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00:30

Problem 29

Dexter Company charges to expense all equipment that costs $$\$ 25$$ or less. What concept supports this policy?

Natalie Anderson

Numerade Educator

Problem 30

Which U.S. government body has the legal power to determine generally accepted accounting principles?

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01:13

Problem 31

What is the basic problem with the monetary assumption when there has been significant inflation?

Prashant Bana

Numerade Educator

02:13

Problem 32

Explain the matching principle. How is the matching principle related to the realization concept?

Mahendra Kumar

Numerade Educator

Problem 33

Briefly explain the term generally accepted accounting principles.

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Problem 34

Briefly describe the operating procedure for Statements of Financial Accounting Standards.

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02:10

Problem 35

What is the FASB Conceptual Framework for Accounting and Reporting intended to provide?

Jennifer Stoner

Numerade Educator

14:09

Problem 36

Briefly describe the following:
a. Committee on Accounting Procedures
b. Committee on Accounting Terminology
c. Accounting Principles Board
d. Financial Accounting Standards Board

Puneet Prajapati

Numerade Educator

Problem 37

The objectives of general-purpose external financial reporting are primarily to serve the needs of management. Comment.

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Problem 38

Financial accounting is designed to measure directly the value of a business enterprise. Comment.

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Problem 39

According to SFAC No. 2, relevance and reliability are the two primary qualities that make accounting information useful for decision making. Comment on what is meant by relevance and reliability.

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01:01

Problem 40

SFAC No. 5 indicates that, to be recognized, an item should meet four criteria, subject to the cost-benefit constraint and materiality threshold. List these criteria.