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Chapter 2: Q14Q. (page 61)

What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?

Short Answer

Expert verified

The basic accounting problem created by the monetary unit assumption is that it does not account for the outcome of inflation or increase in price and the corresponding decrease in purchasing power of people. The FASB expects unadjusted dollar amounts to be used for determining items listed in financial statements.

Step by step solution

01

Meaning of Monetary Unit Assumption

The monetary unit assumption is also termed a money measurement concept. This assumption implies that only those business activities are noted in the accounting books which can be stated in cash. At the same time, non-monetary events like labor-management relations, sales policy, labor unrest, the effectiveness of competition, and so on, which are of vital importance to the business concern, do not find a place in accounting. This is because their effect is not estimable and quantifiable in terms of money.

02

Basic accounting problem created by the monetary unit assumption

The monetary unit assumption presumes that the measuring unit (the dollar) stays the same so that dollars of various years can be accumulated without any modification. When the dollar value changes significantly with time, the monetary unit assumption decreases its effectiveness.

03

FASB position on a stable monetary unit

The Financial Accounting Standards Board (FASB) in Concept No. 5 shows that it anticipates the dollar not adjusted for inflation or deflation to be used for the purpose of evaluating items identified in financial statements. Except if the situation changes considerably, will the Board account for the steadier unit of measurement.

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Most popular questions from this chapter

E2-4 (L03) (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows.

Relevance Neutrality Verifiability

Faithful representation Completeness Understandability

Predictive value Timeliness Comparability

Confirmatory value Materiality Free from error

InstructionsIdentify the appropriate qualitative characteristic(s) to be used given the information provided below.

(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.

(b) Quality of information that confirms users鈥� earlier expectations.

(c) Imperative for providing comparisons of a company from period to period.

(d) Ignores the economic consequences of a standard or rule.

(e) Requires a high degree of consensus among individuals on a given measurement.

(f) Predictive value is an ingredient of this fundamental quality of information.

(g) Four qualitative characteristics that are related to both relevance and faithful representation.

(h) An item is not recorded because its effect on income would not change a decision.

(i) Neutrality is an ingredient of this fundamental quality of accounting information.

(j) Two fundamental qualities that make accounting information useful for decision-making purposes.

(k) Issuance of interim reports is an example of what enhancing quality of relevance?

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?

(Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mentionof these facts was made in the financial statements and the related notes.

Instructions

Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.

(a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted.

(b) Equipment purchases of \(170,000 were partly financed during the year through the issuance of a \)110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at \(60,000.

(c) Weller has reported its ending inventory at \)2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.

(d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.

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.

The treasurer of Landowska Co. has that conservatism is a doctrine that is followed in accounting and, therefore, proposes that several policies be followed that are conservative in nature. State your opinion with respect to each of the policies listed.

  1. The company gives a 2-year warranty to its customers on all products sold. The estimated warranty costs incurred from this year鈥檚 sales should be entered as an expense this year instead of an expense in the period in the future when the warranty is made good.
  2. When sales are made on account, there is always uncertainty about whether the accounts are collectible. Therefore, the treasurer recommends recording the sale when the cash is received from the customers.
  3. A personal liability lawsuit is pending against the company. The treasurer believes there is an even chance that the company will lose the suit and have to pay damages of \(200,000 to \)300,000. The treasurer recommends that a loss be recorded and a liability created in the amount of $300,000.
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