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 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.

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.

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. (Entity)

b. An advance collection for magazine subscriptions is reported as a liability titled Unearned Subscriptions. (Realization)

c. Purchases for office or store equipment for less than $25 are entered in Miscellaneous Expense. (Materiality)

d. A company uses the lower of cost or market for valuation of its inventory. (Conservatism)

e. Partially completed television sets are carried at the sum of the cost incurred to date. (Historical cost)

f.