AC 300-Homework Terms

Monetary Unit Assumption

A common denominator is the dollar

Full Disclosure Principle

All information that could affect decisions should be reported.

An item owned by the company representing probable future benefits

Asset

Important for makin interfirm comparsions

Comparability

Jeff Brown is evaluating two companies for future investment potential. Jeff's task is made easier because both companies use the same accounting methods when preparing their financial statements. Which characteristic does the information Jeff will be using possess?

Comparability

The change in equity from nonowner transactions

Comphrehensive income

Increase in equity during a period from nonowner transactions

Comprehensive income

Materiality

Concerns the relative size of an item and its effect on decisions

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

Conservatism

Allied Appliances, Inc., changed its revenue recognition policies. Which characteristic is jeopardized by this change?

Consistency

A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing the information. Which constraint does this statement describe?

Cost effectiveness

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

Cost effectiveness

Revenue recognition

Criteria usually satisfied for products at point of sale

Decreases in equity resulting from transers to owners

Distribution to owners

Dividends paid by a corporation to its shareholders.

Distribution to owners

Outflow of an asset related to the production of revenue

Expense

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

Expense recognition

Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense. Which principle was violated?

Expense recognition, materiality

Agreement between a measure and the phenomenon it purports to represent

Faithful representation

When there is agreement between a measure or description and the phenomenon it purports to represent, information possesses which characteristic?

Faithful representation

Increase in equity from peripheral or incidental transaction

Gain

Increases in equity from peripheral or incidental transactions of an entity.

Gain

Assumes the entity will continue indefinitely.

Going concern assumption

The basis for measurement of many assets and liabilities

Historical cost principle

An owner's contribution of cash to a corporation in exchange for ownership shares of stock.

Investment by owner

Obligation to transfer cash or other resources as a result of a past transaction

Liability

Sale of an asset used in the operations of a business for less than the asset's book value

Loss

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

Materiality

Concerns the relative size of an item and its effect on decisions.

Materiality

Which component (of the conceptual framework) would allow a large company to record the purchase of a $120 printer as an expense rather than capitalizing the printer as an asset?

Materiality

Revenues plus gains less expenses and losses

Net Income

Donald Kirk, former chairman of the FASB, once noted that " . . . there must be public confidence that the standard-setting system is credible, that selection of board members is based on merit and not the influence of special interests . . ." Which characteristic is implicit in Mr. Kirk's statement?

Neutrality

Relates to the qualitative characteristic of timeliness.

Periodicity assumption

Information is useful in predicting the future

Predictive value

In general, relevant information possesses which qualities?

Predictive value and/or confirmatory value

The process of admitting information into financial statements

Recognition

Expense recognition

Record expenses in the period the related revenue is recognized

Inflow of an asset from providing a good or service

Revenue

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. Which principle was violated?

Revenue recognition

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. Which principle was violated?

The economic entity assumption

Economic Entity Assumption

The enterprise is separate from its owners and other entities.

Going Concern Assumption

The entity will continue indefinitely

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. Which principle was violated?

The full disclosure principle

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. Which principle was violated?

The historical cost (original transaction) principle

periodicity assumption

The life of an enterprise can be divided into artificial time periods.

Historical cost principle

The original transaction value upon acquisition.

Atwell Corporation has not prepared financial statements for external users for over three years. Which principle was violated?

The periodicity assumption

Information is available prior to the decision

Timeliness

National Bancorp, a publicly traded company, files quarterly and annual financial statements with the SEC. Which characteristic is relevant to the timing of these periodic filings?

Timeliness

Users understand the information in the context of the decision being made.

Understandability

Implies consensus among different measurers.

Verifiability

The financial position of a company

assets, liabilities, equity

Information confirms expectations

confirmatory value

Applying the same accounting practices over time.

consistency

Requires consideration

cost effectiveness

All economic events can be identified with a particular entity.

economic entity assumption

The owners' residual interest in the assets of a company

equity

information that could affect decision making should be reported

full-disclosure principle

Inflation causes a violation of this assumption?

monetary unit assumption

The absence of bias

neutrality

Pertinent to the decision at hand.

relevance