Intermediate 1, M1 - Homework

1.2.9. Not a qualitative characteristic, but a practical justification for some accounting choices.

Conservatism

7. The benefits of providing accounting information should exceed the cost of doing so.

Cost effectiveness

6. All economic events can be identified with a particular entity.

Economic entity assumption

1.2.3 Recognizing expenses in the period they were incurred to produce revenue.

Expense recognition

1.1.5 What is violated here? Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense.

Expense recognition; materiality

1.2.2 Information that could affect decision making should be reported.

Full-disclosure principle

1.2.10. Assumes the entity will continue indefinitely.

Going concern assumption

1.1.1 What is violated here? Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent balance sheet.

Historical cost (original transaction value) principal

1.2.4 The basis for measurement of many assets and liabilities.

Historical cost principle

1.2.8. A consequence is that GAAP need not be followed in all situations.

Materiality

1.2.1 Inflation causes a violation of this assumption.

Monetary unit assumption

5. Relates to the qualitative characteristic of timeliness.

Periodicity assumption

1.1.3 What is violated here? The Klingon Company sells farm machinery. Revenue from a large order of machinery from a new buyer was recorded the day the order was received.

Revenue recognition

1.1.4 What is violated here? Don Smith is the sole owner of a company called Hardware City. The company recently paid a $150 utility bill for Smith's personal residence and recorded a $150 expense.

The economic entity assumption

1.1.6 What is violated here? Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached.

The full disclosure principle

1.1.2 What is violated here? Atwell Corporation has not prepared financial statements for external users for over three years.

The periodicity assumption