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Chapter 2: Q10BE (page 64)

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.

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

Financial Reporting CaseIFRS2-5 As discussed in Chapter 1, the International Accounting Standards Board(IASB) develops accounting standards for many international companies. The IASB also has developed a conceptual framework to help guide the setting of accounting standards. While the FASB and IASB have issued converged concepts statements on the objective and qualitative characteristics, other parts of their frameworks differ.

Instructions

Briefly discuss the similarities and differences between FASB and IASB conceptual frameworks as related to elements and their definitions.

E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

  1. Fair value changes are not recognized in the accounting records.
  2. Financial information is presented so that investors will not be misled.
  3. Intangible assets are amortized over periods benefited.
  4. Agricultural companies use fair value for purposes of valuing crops.
  5. Each enterprise is kept as a unit distinct from its owner or owners.
  6. All significant post-balance-sheet events are disclosed.
  7. Revenue is recorded when the product is delivered.
  8. All important aspects of bond indentures are presented in financial statements.
  9. Rationale for accrual accounting.
  10. The use of consolidated statements is justified.
  11. Reporting must be done at defined time intervals.
  12. An allowance for doubtful accounts is established.
  13. Goodwill is recorded only at time of purchase.
  14. A company charges its sales commission costs to expense

(Elements of Financial Statements) Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below.

Assets Distributions to owners Expenses Liabilities Comprehensive Income Gains Equity Revenues Losses Investments by owners

Instructions

Identify the element or elements associated with the 12 items below.(a) Arises from peripheral or incidental transactions.

(b) Obligation to transfer resources arising from a past transaction.

(c) Increases ownership interest.

(d) Declares and pays cash dividends to owners.

(e) Increases in net assets in a period from nonowner sources.

(f) Items characterized by service potential or future economic benefit.

(g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

(h) Arises from income statement activities that constitute the entity鈥檚 ongoing major or central operations.

(i) Residual interest in the assets of the enterprise after deducting its liabilities.

(j) Increases assets during a period through sale of product.

(k) Decreases assets during the period by purchasing the company鈥檚 own stock.(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

Homer Winslow and Jane Alexander are discussing various aspects of the FASB鈥檚 concepts statement on the objective of financial reporting. Homer indicates that this pronouncement provides little, if any, guidance to the practicing professional in resolving accounting controversies. He believes that the statement provides such broad guidelines that it would be impossible to apply the objective to present-day reporting problems. Jane concedes this point but indicates that the objective is still needed to provide a starting point for the FASB in helping to improve financial reporting.Instructions

  1. Indicate the basic objective established in the conceptual framework.
  2. What do you think is the meaning of Jane鈥檚 statement that the FASB needs a starting point to resolve accounting controversies?

Explain the revenue recognition principle.
See all solutions

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