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Chapter 2: Q2Q (page 61)
What is the primary objective of financial reporting?
The primary objective of financial reporting is to provide useful information, track cash flows and deal with liabilities.
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What are the enhancing qualities of the qualitative characteristics? What is the role of enhancing qualities in the conceptual framework?
The chairman of the company鈥檚 board of directors for which you are the chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of directors than 鈥渙ut-of-date costs.鈥� Present some arguments to convince him that accounting data should still be based on historical cost.
ETHICS (Expense Recognition Principle) Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be recognized as assets are used up or liabilities are incurred. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing occurs.
Instructions
Answer the following questions.
(a) What stakeholders should be considered?
(b) What ethical issue, if any, underlies the dispute?
(c) What alternatives should be considered?
(d) Assess the consequences of the alternatives.
(e) What decision would you recommend?
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?
(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.
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