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Chapter 2: BE2-10 (page 64)

Identify which basic principle of accounting is best described in each item below.(a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.(b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.(d) Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

Short Answer

Expert verified

(a) Revenue recognition

(b) Matching principle

(c) Full disclosure

(d) Historical cost

Step by step solution

01

Definition of revenue

Revenue is an income to the company arising due to normal course of business activities. Generally, it will occur by giving services to customers and sale of goods, and some companies getting this revenue from interest, fees and royalties.

02

(a) Revenue recognition principle

Reason - Revenue is recognized in the period it is earned (GAAP)

Revenue recognition principle: Revenue is recognized for accounting records as and when the related performance obligation is complete. The performance obligation arises if a company sells a product or provides service to its customer. Once the performance obligation is satisfied by a company it should record revenue in the respective accounting period.

03

(b) Matching principle:

Under the matching principle in accrual basis accounting, expenses are matched with the benefits derived from the expense in the same income statement period. Expenses, which do not pertain to a period, are excluded from reporting in the period.

Reason - Expense is matched with the period revenue is earned.

04

(c) Full Disclosure principle

Reason - Pending lawsuit is disclosed to its investor as a foot note.

Full disclosure about all the disputes and conflicts against the company need to be shown and other perceived problems and liabilities and legal issues need to be disclosed in order to maintain transparency.

05

(d) Historical cost

Accounting is concerned with past events and it requires consistency and comparability that is why it requires the accounting transactions to be recorded at their historical costs. This is known as historical concept.

Reason - Cost in the balance sheet is the cost it acquired.

Historical cost is the cost, which is there on the day of transaction, which is the past event cost.

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Most popular questions from this chapter

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.

a) Legal fees paid in connection with the purchase of land are \(1,500.

b) Eduardo, Inc. paves the driveway leading to the office building at a cost of \)21,000.

c) A meat market purchases a meat-grinding machine at a cost of \(3,500.

d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.

e) Smith's Hardware Company pays \)9,000 in wages to laborers for construction on a building to be used in the business.

f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.

BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.

  1. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
  2. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
  3. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
  4. Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

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.

(Revenue Recognition Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the company's magazine. She feels that the 鈥渃rucial event鈥� in the process of earning revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be 鈥渞ecognized" in the period of the cash sale. Instructions

Discuss the propriety of timing the recognition of revenue in Piper Publishing Company's accounts with:

(a) The cash sale of the magazine subscription.

(b) The publication of the magazine every month.

(c) Over time, as the magazines are published and delivered to customers.

The life of a business is divided into specific time periods, usually, a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period.

  1. This practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption.
  2. What has been the effect of the practice on accounting? What is its relation to the accrual system? What influence has it had on accounting entries and methodology?
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