/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} 6E (Assumptions, Principles, and Co... [FREE SOLUTION] | 魅影直播

魅影直播

Log out

Learning Materials

Features

Discover

Chapter 2: 6E (page 67)

(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.

1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principle

Instructions

Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once

.(a) Allocates expenses to revenues in the proper period.

(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)

(c) Ensures that all relevant financial information is reported.

(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)

(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.

(g) Assumes that the dollar is the 鈥渕easuring stick鈥� used to report on financial performance.

Short Answer

Expert verified

a) Expense recognition principle, (b) Measurement principle (historical cost), (c) Full disclosure principle (d) Going concern assumption (e) Economic entity assumption (f) Periodicity assumption (g) Monetary unit assumption

Step by step solution

01

(a) Company has allocated expenses to revenues in proper order – Expense recognition principle

Expense recognition principle 鈥揟he expense recognition principle concept states that the company or the firm must recognize the expenses and revenues related to that expenses in the same period only.

Allocating the expenses to that revenues in chronological or proper order comes under the expense recognition principle.

02

(b) The fair value changes subsequent to the purchase that is not recorded in the accounts books – Measurement principle (Historical cost)

Historical cost principle 鈥揟he historical cost states that the prices of the assets must be recorded in the books of accounts at their original cost which is the amount that is spent to purchase that asset but not the market value.

The fair value of the asset changes but the original cost must be recorded in the books of accounts and comes under the measurement of historical cost principle.

03

(c) Recording all the transactions of the business – Full disclosure principle

Full disclosure principle 鈥揟he principle states that the company must record all the transactions of the business without hiding anything.

Ensuring that all the business transactions are recorded in the books of accounts comes under the full disclosure principle.

04

(d)  Plants or assets prices are not recorded as per liquidation value – Going concern assumption

Going concern assumption 鈥揑t states that the company or the entity runs for a longer period of time. That is the reason why the prices of the plants or assets are not recorded as per the liquidation value because the company runs for a longer period of time.

Ensuring that all the business assets that are not recorded in the books of accounts at their liquidated value come under the going concern assumption.

05

(e) Maintaining separate books for personal transactions and business transactions  – Economic entity assumption

Economic entity assumption 鈥揑t states that the transactions related to business and transactions related to personal expenses must be kept separately. Business and owner are two separate entities.

Ensuring that all the business transactions books and personal transactions books that are kept separately come under the Economic entity assumption.

06

(f) The financial information is divided into different time periods for reporting   – Periodicity assumption

Periodicity assumption 鈥揑t states that the transactions related to business can be reported in different time periods. The time periods can be monthly, quarterly, or annually.

Ensuring that all the business transactions are reported in different time periods comes under the Periodicity assumption.

07

(g) Dollar is the measuring stick that is used to report financial performance – Monetary unit assumption

Monetary unit assumption 鈥揑t states that money is considered the unit of measurement. All the business transactions should be expressed in terms of monetary value that is rupee, dollar, euro, and so on.

Ensuring that all the business transactions are expressed in terms of monetary value comes under the Monetary unit assumption.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 魅影直播!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Identify which basic assumption of accounting is best described in each item below.

a)The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports.

b)Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.

c)Walgreen Co. reports current and non-current classifications in its balance sheet.

d)The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.

The life of a business is divided into specific time periods, usually, a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period.

  1. This practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption.
  2. What has been the effect of the practice on accounting? What is its relation to the accrual system? What influence has it had on accounting entries and methodology?

(Revenue Recognition Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the company's magazine. She feels that the 鈥渃rucial event鈥� in the process of earning revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be 鈥渞ecognized" in the period of the cash sale. Instructions

Discuss the propriety of timing the recognition of revenue in Piper Publishing Company's accounts with:

(a) The cash sale of the magazine subscription.

(b) The publication of the magazine every month.

(c) Over time, as the magazines are published and delivered to customers.

How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?

Question: (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the 鈥済round floor鈥� of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/party items.

You have told Uncle Carlos that, unless you can take a look at Neville鈥檚 financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville鈥檚 most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240.

The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available.

Instructions

Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful.
See all solutions

Recommended explanations on Business Studies Textbooks

Managers

Read Explanation

Family Business

Read Explanation

Finance Literacy (Business Studies)

Read Explanation

Organizational Behavior

Read Explanation

Business Case Studies

Read Explanation

Strategy

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.