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ch1 solutions - Gibson Financial Reporting Analysis 11e...

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Gibson, Financial Reporting & Analysis, 11e 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. Its role was substantially reduced in 1973 when the Financial Accounting Standards Board was established. Its role was further reduced with the establishment of the Public Company Accounting Oversight Board 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 was 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- 3. The concept of historical cost determines the balance sheet valuation of land. The realization concept requires that a transaction has occurred 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 not be appropriate. 1
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Gibson, Financial Reporting & Analysis, 11e 1- 7. With 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 words, 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 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. But it is not necessary that the statements be completely accurate in order for them to be meaningful. 1- 9. a. A year that ends when operations are at a low ebb for the year. b. The accounting time period is ended on December 31.
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