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Chapter 2: Question 2CE (page 73)

Briefly describe how the organization of the FASB Codification corresponds to the elements of financial statements.

Short Answer

Expert verified

The FASB Codification is strongly connected with the components of financial statements attached to the Conceptual Framework. It is clear when looking at the 鈥淏rowse section鈥� format, which has a principal interface for assets, liabilities, equity, revenues as well as expenses.

Step by step solution

01

Meaning of Financial Statements

The primary purpose of a financial statement is to aid the decision-making process and enable users to make rational investment, lending and credit, and other similar financial decisions, which will also help them estimate future cash flows as well as assess the risks of potential bankruptcy.

02

Correspondence of the FASB Codification to the elements of financial statements

The organization of the FASB Codification is identical to the aspects of financial statements as defined in the Conceptual Framework. It reflects the assets, liabilities, equity, revenues, and expenses, which are the key elements defined in the Conceptual Framework.

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Most popular questions from this chapter

BE2-11 (L06) Vande Velde Company made three investments during 2017.

(1) It purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model.

(2) It purchased 2,000 shares of GE stock, which trades on the NYSE.

(3) It invested $10,000 in local development authority bonds. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds.

Where will Vande Velde report these investments in the fair value hierarchy?

Question: Wal-Mart Stores, Inc.

Wal-Mart Stores, Inc. provided the following disclosure in a recent annual report.

New accounting pronouncement (partial) . . . the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101鈥斺�淩evenue Recognition in Financial Statements鈥� (SAB 101). This SAB deals with various revenue recognition issues, several of which are common within the retail industry. As a result of the issuance of this SAB . . . the Company is currently evaluating the effects of the SAB on its method of recognizing revenues related to layaway sales and will make any accounting method changes necessary during the first quarter of [next year].

In response to SAB 101, Wal-Mart changed its revenue recognition policy for layaway transactions, in which Wal-Mart sets aside merchandise for customers who make partial payment. Before the change, Wal-Mart recognized all revenue on the sale at the time of the layaway. After the change, Wal-Mart does not recognize revenue until customers satisfy all payment obligations and take possession of the merchandise.

Instructions

(a) Discuss the expected effect on income (1) in the year that Wal-Mart makes the changes in its revenue recognition policy, and (2) in the years following the change.

(b) Evaluate the extent to which Wal-Mart鈥檚 previous revenue policy was consistent with the revenue recognition principle.

(c) If all retailers had used a revenue recognition policy similar to Wal-Mart鈥檚 before the change, are there any concerns with respect to the qualitative characteristic of comparability? Explain.

Question: BE2-5 (L03) Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material.(

a) Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net income.

(b) Hindi Co. has an unusual gain of \(3.1 million on the sale of plant assets and a \)3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Hindi Co.'s income for the current year was \(10 million.

(c) Damon Co. expenses all capital equipment under \)25,000 on the basis that it is immaterial. The company has followed this practice for a number of years.

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?

CA2-7 (Expense Recognition Principle) Accountants try to prepare income statements that are as accurate as possible. A basic requirement in preparing accurate income statements is to record costs and revenues properly. Proper recognition of costs and revenues requires that costs resulting from typical business operations be recognized in the period in which they expired.

Instructions

(a) List three criteria that can be used to determine whether such costs should appear as charges in the income statement for the current period

.(b) As generally presented in financial statements, the following items or procedures have been criticized as improperly recognizing costs. Briefly discuss each Item from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the financial information.

(1) Receiving and handling costs.

(2) Cash discounts on purchases.
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