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Chapter 2: Q7E (page 67)

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

Short Answer

Expert verified

Under the study of financial reporting, theconceptual framework hasassumptions, principles, and constraintsas the three basic criteria forrecognition and measurement.

Step by step solution

01

Meaning of conceptual framework

Theconceptual frameworkis the source of information that guides the members in understanding the main purpose behind the specific accounting standard.

02

Explanation for Part (a)

  • TheMeasurement principle will be the correct answer. Fair value changes are not recognized in the accounting records to avoid subjectivity in the information being presented to the users.
03

Explanation for Part (b)

  • Thefull disclosure principle will be the correct answer. Financial information will be presented to the users so that the investors can make better decisions and will not be misled.
04

Explanation for Part (c)

  • Theexpense recognition principle will be the correct answer. Amortization of intangible assets is recorded as an expense over the period befitted; this helps to match the expenses incurred with the revenue generated.
05

Explanation for Part (d)

  • Themeasurement principle will be the correct answer. Agricultural companies use fair value to value crops because the price of crops is readily available in the market.
06

Explanation for Part (e)

  • Theeconomic entity assumption will be the correct answer since each enterprise is kept as a unit separate from its owner(s) for establishing accountability.
07

Explanation for Part (f)

  • Thefull disclosure principle will be the correct answer. Under which all significant post-balance-sheet events are disclosed to ensure a fair presentation.
08

Explanation for Part (g)

  • Therevenue recognition principlewill be the correct answer. Revenue is recognized when the product is delivered, i.e., when the obligation to make sales is satisfied.
09

Explanation for Part (h)

  • Thefull disclosure principlewill be the correct answer. All important aspects of bond indentures are presented in financial statements in order to ensure full disclosure of information.
10

Explanation for Part (i)

  • Theexpense recognition principle will be the correct answer. The rationale for accrual accounting is that all expenses should be recorded on an accrual basis so that the prudent investor is not misled.
11

Explanation for Part (j)

  • Theeconomic entity assumption will be the correct answer. Consolidated financial statements are appropriate and used as justifying since the entire entity is considered a separate unit.
12

Explanation for Part (k)

  • Theperiodicity assumption will be the correct answer. Reporting is to be done at defined time intervals so the business entity can compare the results of one period with those of another.
13

Explanation for Part (l)

  • The expense recognitionprinciple will be the correct answer. An allowance for doubtful accounts is established to provide a fair estimation of realizable value from the debtors.
14

Explanation for Part (m)

  • Themeasurement principle will be the correct answer. Goodwill is recorded only at the time of purchase because estimating the fair value of self-generated goodwill is subjective.
15

Explanation for Part (n)

  • The expense recognition principle will be the correct answer. The sales commission cost is an expense because it is necessary to make the required sales.

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Most popular questions from this chapter

Which of the following statements about the IASB and FASB conceptual frameworks is not correct?

(a) The IASB conceptual framework does not identify the element comprehensive income.

(b) The existing IASB and FASB conceptual frameworks are organized in similar ways.

(c) The FASB and IASB agree that the objective of financial reporting is to provide useful information to investors and creditors.

(d) IFRS does not allow use of fair value as a measurement basis.

E2-3 (L03,7) GROUPWORK (Qualitative Characteristics) SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint.

(a) What is the quality of information that enables users to confirm or correct prior expectations?

(b) Identify the pervasive constraint developed in the conceptual framework.

(c) The chairman of the SEC at one time noted, 鈥淚f it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined.鈥� Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.)

(d) Muruyama Corp. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?

(e) Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.)

(f) What are the two fundamental qualities that make accounting information useful for decision-making?

(g) Watteau Inc. does not issue its first-quarter report until after the second quarter鈥檚 results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

(h) Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes?

(i) Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed?

(j) Roddick Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use relevance or faithful representation.)

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?

(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.

1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principle

Instructions

Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once

.(a) Allocates expenses to revenues in the proper period.

(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)

(c) Ensures that all relevant financial information is reported.

(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)

(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.

(g) Assumes that the dollar is the 鈥渕easuring stick鈥� used to report on financial performance.

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?
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