Intermediate Accounting Ch. 1 HW and Quiz
Identify the basic assumption or broad accounting principle that was violated in each of the following situations 1. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured. 2. McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million. 3. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expenses.
1. Expense recognition 2. The historical cost (original transaction value) principle 3. The economic entity assumption
Identify the basic assumptions or broad accounting principles that was violated in each of the following situations. 1. 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. 2. Atwell Corporation has not prepared financial statements for external users for over three years. 3. 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. 4. 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. 5. Golden Book Company purchases a large printing machine for $1000,000 (a material amount) and recorded the purchase as an expense. 6. 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.
1. The historical cost (original transaction value) principle 2. The periodicity assumption 3. Revenue recognition 4. The economic entity assumption 5. Expense recognition; materiality 6. The full disclosure principle
Listed below are several transactions that took place during the second and third year of RPG Consulting. Year 2 Year 3 Amounts billed to customers $280,000 $380,000 for services rendered Cash collected from credit 190,000 330,000 customers Cash disbursements: Payment of rent 73,000 0 Salaries paid to employees 133,000 153,000 for services rendered during the year 23,000 Travel and entertainment 23,000 33,000 Advertising 11,500 28,000 In addition you learn that the company incurred advertising costs of $18,000 in year 2, owed the advertising agency $4,300 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period year 2 and year 3. Required 1. Calculate accrual net income for both years 2. Determine the amount due the advertising agency that would be shown as a liability on RPG's balance sheet at the end of year 2
1. Year 2 Year 3 Revenues $280,000 $380,000 Expenses: Rent 36,500 36,500 Salaries 133,000 153,000 Travel and entertainment 23,000 33,000 Advertising 18,000 17,200 Net income 69,500 140,300 2. $10,800
The conceptual framework's qualitative characteristic of relevance includes: A. Predictive value. B. Verifiability. C. Completeness. D. Neutrality.
A. Predictive value.
Porite Company recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. Porite's practice is an example of: A. Cash basis accounting. B. Accrual accounting. C. The matching principle. D. Economic entity.
B. Accrual accounting
Corporations issue their shares to the investing public in the: Primary Market Secondary Market a. Yes Yes b. No Yes c. Yes No d. No No Choose one A. Option a B. Option b C. Option c D. Option d
C. Option c
Which of the following has the statutory authority to set accounting standards in the United States? A. FASB. B. IRS. C. SEC. D. AICPA.
C. SEC.
GAAP is an abbreviation for: A. Generally authorized accounting procedures. B. Generally applied accounting procedures. C. Generally accepted auditing practices. D. Generally accepted accounting principles.
D. Generally accepted accounting principles.
According to the FASB's Statements of Financial Accounting Concepts, conservatism is a desired qualitative characteristic of accounting information. True or False
False
Listed below are several terms and phrases associated with the FASB's conceptual framework. Pair each item from list A with the item from list B that is most appropriately associated with it. List A List B 1. Predictive value 2. Relevance 3. Timeliness 4. Distribution to owners 5. Confirmatory value 6. Understandability 7. Gain 8. Faithful representation 9. Comprehensive income 10. Materiality 11. Comparability 12. Neutrality 13. Recognition 14. Consistency 15. Cost effectiveness 16. Verifiability
List B 1. Information is useful in predicting the future. 2. Pertinent to the decision at hand. 3. Information is available prior to the decision. 4. Decreases in equity resulting from transfers to owners. 5. Information confirms expectations. 6. Users understand the information in the context the decision is being made. 7. Results if an asset is sold for more than its book value. 8. Agreement between a measure and the phenomenon it purports to represent. 9. The change in equity from nonowner transactions. 10. Concerns the relative size of an item and its effect on decisions. 11. Important to making interfirm comparisons. 12. The absence of bias. 13. The process of admitting information into financial statements. 14. Applying the same accounting practices over time 15. Requires consideration of the costs and value of information. 16. Implies consensus among different measures.
Listed below are several terms and phrases associated with basic assumptions, broad accounting principles, and constraints. Pair each item from list A with the item from list B that is most appropriately associated with it. List A List B 1. Expense recognition 2. Periodicity 3. Historical cost principle 4. Materiality 5. Revenue recognition 6. Going concern assumption 7. Monetary unit assumption 8. Economic entity assumption 9. Full-disclosure principle
List B 1. Record expenses in the period the related revenue is recognized. 2. The life of an enterprise can be divided into artificial time periods. 3. The original transaction value upon acquisition 4. Concerns the relative size of an item and its effect on decisions. 5. Criteria usually satisfied for products at point of sale. 6. The entity will continue indefinitely. 7. A common denominator is the dollar. 8. The enterprise is separate from its owner and other entities. 9. All information that could affect a decision should be reported.
The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed the entity responsible for setting auditing standards in the United States. True or False
True
The primary function of financial accounting is to provide relevant financial information to parties external to business enterprises. True or False
True
The purpose of the conceptual framework is to provide a structure and framework for a consistent set of GAAP. True or False
True
Under federal securities laws, the SEC has the authority to set accounting standards in the United States. True or False
True
