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Chapter 2: 8BE (page 64)

Identify which basic assumption of accounting is best described in each item below.

a)The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports.

b)Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.

c)Walgreen Co. reports current and non-current classifications in its balance sheet.

d)The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.

Short Answer

Expert verified

a) Periodicity assumption

b) Monetary unit assumption

c) Going concern assumption

d) Economic entity assumption

Step by step solution

01

Meaning of Accounting Assumptions:

The accounting assumptions are the set of rules based on which the business operations are conducted to ensure compliance with standards set by the FASB.

02

Explanation for statement (a)

  • Theperiodicity assumptionwill be the correct answer for the given statement.

  • It states that the entity's activities need to be broken into different time frames for measuring the activities of the business. E.g. 12 months period is used for issuing annual reports.

03

Explanation for statement (b)

  • Themonetary unit assumptionwill be the correct answer for the given statement.

  • It states that the monetary unit is the most suitable basis for reporting the economic activities of the business entity. E.g. the US dollar rates are relatively stable; thus, the figures are not adjusted for inflation while reporting in the US.

04

Explanation for statement (c)

  • Thegoing concern assumptionwill be the correct answer for the given statement.

  • It states that the entity will continue its business for an unforeseeable future. Thus, the entity classifies its assets between current and non-current.

05

Explanation for statement (d)

  • The correct answer for the given statement will be theeconomic entity assumption.

  • It states that the economic activities of the business should be associated with a specific unit for establishing its accountability. For E.g. the economic activities of the entire group are reported since it forms a separate economic unit.

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Most popular questions from this chapter

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

What are the enhancing qualities of the qualitative characteristics? What is the role of enhancing qualities in the conceptual framework?

Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information.

Instructions

a) Describe briefly the following characteristics of useful accounting information.

1. Relevance (4) Comparability

2. Faithful representation (5) Consistency

3. Understandability

b)For each of the following pairs of information characteristics, give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other.

1. Relevance and faithful representation.

2. Relevance and consistency.

3. Comparability and consistency.

4. Relevance and understandability.

c) What criterion should be used to evaluate trade-offs between information characteristics?

According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.

Question: (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the 鈥済round floor鈥� of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/party items.

You have told Uncle Carlos that, unless you can take a look at Neville鈥檚 financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville鈥檚 most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240.

The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available.

Instructions

Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful.
See all solutions

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