Accounting Assumptions and Concerns scenerios

YES Valid - Example of the Business Entity Concept (also known as Separate Entity Concept and Economic Entity Concept) 2

A corporation such as the Ford Motor Company has many owners (stockholders). The business entity concept enables us to account for the Ford Motor Company entity separately from the transactions of the owners (stockholders) of the Ford Motor Company

Matching Principle - concept of ACCRUAL ACCOUNTING - definition

important concept of accrual accounting which states that the Revenues and Related Expenses must be matched in the same period to which they relate and the expenses must relate to the period in which they have been incurred and not to the period in which the payment for them is made. Expenses must be related to the Revenues generated in the exact same time period

Why is this an example of the Matching Principle (concept of accrual accounting)

A Law Firm pays $4,000/month fixed salary to 6 of its consultants. The same Law Firm earned revenues of $230,000 and $180,000 in June and July respectively. The expense for the two months would be the same $24,000 ($4,000 × 6) as the salaries are fixed. But the profits for the months of June and July would be $206,000 ($230,000 - $24,000) and $156,000 ($180,000 - $24,000) respectively. Why?

NO not Valid - Matching Principle (concept of accrual accounting)

A company has a policy to pay a bonus of 1% on its sales in a quarter, to every single sales representative. Now if the company has 4 sales representatives and each of them secured sales of $100,000 in the first Quarter of the year, each of them earned a bonus of $1000. As there are 4 of them the total bonus expense to be paid by the company would be $4,000 (4 × $1000). If for instance the company paid the bonus in the month of May which falls in the second quarter of the year. YES OR NO the entity is in compliance with the matching concept

No not Valid - Going Concern Concept

A company manufactures a chemical known as Chemical-X. Suddenly, the government imposes a restriction on the manufacture, import, export, marketing and sale of this chemical in the country. If Chemical-X is the only product that company manufactures, the company Yes or No the entity is in compliance with the Going Concern

YES Valid - Example of the Business Entity Concept (also known as Separate Entity Concept and Economic Entity Concept) 1

An individual may own a grocery store, a farm and numerous personal assets. To determine the economic success of the grocery store, we would view it separately from the others resources owned by the individual

Matching Principle ( concept of Accrual Accounting) Expenses Recognition

Expenses must be recognized when they are incurred and the revenue connected to them is recognized, irrespective of the outflow of cash or its equivalent.

Matching Principle ( concept of Accrual Accounting) Revenues Recognition

For a company, Revenues must be recognized when the entity is sure that it has earned those revenues by fulfilling their part of agreement and that the other party will also fulfill its duty in terms of payment.

Net Profits Earned formula

Generated Revenues - Incurred Expenses

NO not Valid - Going Concern Concept

If a company closes a small business segment or discontinues one of its product and continues with others, Yes or No the entity is in compliance with the Going Concern because the going concern concept is applicable to the entity as a whole not to the particular segment of business or product.

Yes Valid - Going Concern Concept

If an entity has no evidence to believe that it will or will have to cease its operations in the foreseeable future Yes or No the entity is in compliance with the Going Concern

NOT Invalid - Example of the Business Entity Concept (also known as Separate Entity Concept and Economic Entity Concept)

Mr. John has acquired a floor of a building having 3 walls for $1500 per month. He uses 2 walls for his business and one for personal purposes. A valid expense of the business would be the entire $1500 per month.

YES Valid - Going Concern Concept (b)

The Eastern company closes one of its branch and will continue with others. The company is Yes or No the entity is in compliance with the Going Concern because the shutting down a small part of business does not impair the ability of the company to operate as going concern.

Consequences if a Business Entity ignores the Business Entity Concept (also known as Separate Entity Concept and Economic Entity Concept)

The business would not be able to compare its financial performance with that of others in the industry

What is the main purpose of the Matching Concept (concept of Accrual Accounting)

To avoid any possibility of misstatement of Profits for a period. (as the expenses and revenue work under the basic equation of the INCOME STATEMENT) because a business cannot generate sales or revenues without incurring expenses like cost of raw materials, marketing expenses, selling expenses, administrative expenses or other sundry expenses (various items not important to mention individually) and So - only reporting revenues for a given period without showing the expenses that were responsible to bring those revenues could alter the face of the financial statements by either OVERSTATING or UNDERSTATING the Profits of a company - resulting in wrong decision making by the end user of those statements

Yes Valid - Matching Principle (concept of accrual accounting)

a company consumes electricity for the whole month of January, but pays its electricity bill in February. So if the company has been operating under : "CASH BASED ACCTG", they may have recorded the expense in the month of February, as it has actually paid cash in February. under "ACCRUAL ACCTG" the entity is bound to record the electricity expense for the month of January and not February, because the expense has originally been incurred in January.

Business Entity Concept - definition

Concept states that the transactions related to a business must be recorded separately from those of its owners and any other business

Going Concern Concept - definition

Implies that the business will continue its operations in the future and will NOT liquidate or be forced to discontinue operations due to any reason. ** This concept is applicable to the company's entity/business as a whole.

Yes Valid - Going Concern Concept (c)

Important: If applicable a business entity must prepare its financial statements in accordance with the applicable Financial reporting framework such as (GAAP) principals in the USA and international financial reporting standards (IFRS) Yes or No the entity is in compliance with the Going Concern

YES Valid - Going Concern Concept (a)

The National company is in serious financial trouble and cannot pay its obligations. The government gives National company a bailout and a guarantee of all payments to creditors. The national company is Yes or No the entity is in compliance with the Going Concern despite of its current weak financial position.

No not valid - Going Concern Concept (c)

The Small company is unable to make payments to its creditors due to a very weak liquidity position. The court grants the order of liquidating the company upon the request of one of the company's creditors. The company is Yes or No the entity is in compliance with the Going Concern because sufficient evidence is available to believe that the company cannot continue its operations in future.

Yes Valid - Going Concern Concept (a)

The computation of depreciation on the basis of expected economic life of fixed assets rather than their current market value. Companies assume that their business will continue for an indefinite period of time and the assets will be used in the business until fully depreciated Yes or No the entity is in compliance with the Going Concern

Yes Valid - Going Concern Concept (b)

The repayment and accrual of expenses - indicate that a company believes that they will continue operations in the future Yes or No the entity is in compliance with the Going Concern