Financial Statement Analysis
Financial Reporting & Analysis Questions
Professor Mahoney
Spring 2013

Chapter 1: Introduction to Financial Reporting

I. Questions

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?

Consistency allows for the same accounting principle from period to period. A change in principle requires statement disclosure.

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 appraised just told us we could easily …show more content…
b. Calender year

The accounting time period is ended on December 31.

c. Fiscal year

A twelve-month accounting period that ends at the end of a month other than December 31.

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

Yes, inventory that has a market value below the historical cost should be written down 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.

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.

End of production: the realization of revenue at the completion of the production process is acceptable when the price of the item is known and there is a ready market.

Receipt of cash: this method should only be used when the prospects of collection are especially doubtful at the time of sale.

During production: this method is allowed for long-term construction projects because recognizing revenue on long-term construction projects as work progresses tends to give a fairer picture of the results for a given period in comparison with having the entire revenue