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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

Question: The issues that the FASB and IASB must address in developing a conceptual framework include all of the following except:

(a) should the characteristic of relevance be traded-off in favor of information that is verifiable?

(b) should a single measurement method such as historical cost be used?

(c) what are the key elements of asset and liability definitions?

(d) should the role of financial reporting focus on internal decision-making as well as providing information to assist users in decision-making?

BE2-1 (L03) Match the qualitative characteristics below with the following statements. 1. Relevance 5. Comparability 2. Faithful representation 6. Completeness 3. Predictive value 7. Neutrality 4. Confirmatory value 8. Timeliness (a) Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena. (b) Having information available to users before it loses its capacity to influence decisions. (c) Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future. (d) Information that is capable of making a difference in the decisions of users in their capacity as capital providers. (e) Absence of bias intended to attain a predetermined result or to induce a particular behavior.

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

What is meant by term 鈥渜ualitative characteristics of accounting information鈥�?

Question: An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time period. In some situations, costs are recognized as expenses at the time of product sale. In other situations, guidelines have been developed for recognizing costs as expenses or losses by other criteria.Instructions

  1. Explain the rationale for recognizing costs as expenses at the time of product sale.
  2. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain.
  3. In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense?
  4. Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale for recognizing expenses on the basis of systematic and rational allocation of asset cost.
  5. Identify the conditions under which it would be appropriate to treat a cost as a loss.
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