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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 Oversight Board was established in 2002.
b. The Financial Accounting Standards Board replaced the Accounting
other than public accountants.
c. The SEC has the authority to determine generally accepted accounting
standards since 1973. Regulation of the accounting profession was
1- 2. Consistency is obtained through the application of the same accounting
disclosure.
1- 3. The concept of historical cost determines the balance sheet valuation of land.
to be recognized.
1- 5. Entity concept
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1- 6. Generally accepted accounting principles do not apply when a firm does not
1- 7. With the time period assumption, inaccuracies of accounting for the entity,
because of incomplete information about the future in exchange for more
material inaccuracies are not acceptable.
1- 8. It is true that the only accurate way to account for the success or failure of an
1- 9. a. A year that ends when operations are at a low ebb for the year.
than December 31.
1-10. Money.
1-11. When money does not hold a stable value, the financial statements can lose
1-12. No. There is a problem with determining the index in order to adjust the
quality, technology, and inflation.
1-13. False. An arbitrary write-off of inventory cannot be justified under the
measurements has reasonable support.
1-14. Yes, inventory that has a market value below the historical cost should be
current period.
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1-15. End of production
Receipt of cash
During production
1-16. It is difficult to apply the matching concept when there is no direct connection
1-17. If the entity can justify the use of an alternative accounting method on the
1-18. The accounting reports must disclose all facts that may influence the
one of the most difficult concepts for the accountant to apply.
1-19. There is a preference for the use of objectivity in the preparation of financial
1-20. This is a true statement. The concept of materiality allows the accountant to
possible.
1-21. Some industry practices lead to accounting reports that do not conform to
accepted accounting principles.
1-22. Events that fall outside of the financial transactions of the entity are not
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1-23. True. The accounting profession is making an effort to reduce or eliminate
specific industry practices.
1-24. The entity must usually use the accrual basis of accounting. Only under
1-25. The FASB commenced the Accounting Standards Codification™ project to
authoritative GAAP.
1-27. At the point of sale
1-28. a. The building should be recorded at cost, which is $50,000.
purchasing.
1-29. The materiality concept supports this policy.
1-30. The Securities and Exchange Commission (SEC).
1-31. The basic problem with the monetary assumption when there has been
compared that are not of the same purchasing power.
1-32. The matching principle deals with the costs to be matched against revenue.
1-33. The term “generally accepted accounting principles” is used to refer to
1-34. The process of considering a Statement of Financial Accounting Standards
On projects with a broad impact, a Discussion Memorandum or an Invitation
to Comment is issued. The Discussion Memorandum or Invitation to
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Financial Accounting Standards must receive a majority affirmative vote of the
Board.
1-35. The FASB Conceptual Framework for Accounting and Reporting is intended
and reporting.
1-36. a. A committee of the AICPA that played an important role in the
accounting terminology between 1939 and 1959.
c. An AICPA board that played a leading role in the development of
1959 and 1973.
d. The Board that has played the leading role in the development of
1973.
1-37. Concepts Statement No. 1 indicates that the objectives of general-purpose
information management communicates to them.
1-38. Financial accounting is not designed to measure directly the value of a
estimate its value.
1-39. According to Concepts Statement No. 2, to be relevant, information must be
verifiable and neutral.
1-40. 1. Definition
2. Measurability
1-41. 1. Historical cost
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2. Current cost
1-42. The accrual basis income statement recognizes revenue when it is realized
received and expenses when payments are made.
1-43. True. Usually the cash basis does not indicate when the revenue was earned
1-44. When cash is received and when payment is made is important. For example,
1-45. Sarbanes-Oxley Section 404 requires companies to document adequate
1-46. The financial statements auditor must report on management’s assertion as to
year end.
1-47. There have been many benefits for implementing Sarbanes-Oxley.
preventing problems and improve their ability to be proactive. Users of
1-49. In many instances, the natural business year of a company ends on
1-50. Accounting Trends & Techniques is a compilation of data obtained by a
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1-51. The Sarbanes-Oxley Act of 2002 has put demands on management to detect
1-52. The PCAOB is the private sector corporation created by the Sarbanes-Oxley
Exchange Commission.
1-53. The Serious concerns were about the cost of adoption, the benefits of
1-54. The Financial Accounting Standards Board (FASB) and the International
used for both domestic and cross-border financial reporting (this is known as
the Norwalk Agreement).
1-55. The American Accounting Association Committee on Financial Reporting
Policy concluded that eliminating the reconciliation in requirements was
premature. Several of their points follow:
1. Material reconciling items exist between U.S. GAAP and IFRS and the
markets appear to impound to stock prices.
implementation of any single set of standards.
3. Legal and institutional obstacles inhibit private litigation against foreign
actions against cross-listed firms.
5. Harmonization appears to be occurring via the joint standard-setting
the SEC appears to be unnecessary.
1. On the con side, a deep concern is that the differences in financial
of uniformity.
2. Despite increased globalization, most political and economic influences on
financial reporting practice remain local.
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3. The fundamental reason for being skeptical about uniformity of
remain primarily local.
enforcement mechanism for its standards.
1-57. 2009. The issue of SMEs is not part of the roadmap of convergence between
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PROBLEMS
PROBLEM 1-1
1.
b
3.
h
5.
d
7.
e
9.
g
2.
a
4.
c
6.
i
8.
f
PROBLEM 1-2
1.
o
6.
11.
h
2.
a
7.
12.
k
3.
b
8.
13.
c
4.
l
9.
14.
m
5.
d
10
15
n
PROBLEM 1-3
statements.
b. 4 Financial accounting is not designed to measure directly the value of a
business enterprise. The end result statements can be used as part of the
data to aid in estimating the value of the business.
d. 2 The Securities and Exchange Commission has the primary right and
responsibility for generally accepted accounting principles. They have
primarily elected to have the private sector develop generally accepted
accounting principles and have designated the Financial Accounting
Standards Board as the primary source.
selected.
f. 3 The Internal Revenue Service deals with Federal tax law, not generally
accepted accounting principles.
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PROBLEM 1-4
a. 1 Statements of Position have been issued by the AICPA.
c. 2 This is the definition contained in SFAC No. 6.
d. 5 Comparability is not one of the criteria for an item to be recognized.
No. 5.
f. 1 Revenue is usually recognized at point of sale.
g. 1 Financial accounting is not designed to measure directly the value of a
business enterprise.
PROBLEM 1-5
a. Sales on credit $ 80,000
Cost of inventory sold on credit (65,000)
Payment to sales clerk (10,000)
Income $ 5,000
b. Collections from customers $ 60,000
Payment for purchases (55,000)
Payment to sales clerk (10,000)
Loss $(5,000)
PROBLEM 1-6
1.
a
6.
11.
l
16.
g
2.
r
7.
12.
m
17.
e
3.
o
8.
13.
p
18.
c
4.
q
9.
14.
n
19.
s
5.
b
10.
15.
k