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Chapter 2: 8BE (page 64)

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.

Short Answer

Expert verified

a) Periodicity assumption

b) Monetary unit assumption

c) Going concern assumption

d) Economic entity assumption

Step by step solution

01

Meaning of Accounting Assumptions:

The accounting assumptions are the set of rules based on which the business operations are conducted to ensure compliance with standards set by the FASB.

02

Explanation for statement (a)

  • Theperiodicity assumptionwill be the correct answer for the given statement.

  • It states that the entity's activities need to be broken into different time frames for measuring the activities of the business. E.g. 12 months period is used for issuing annual reports.

03

Explanation for statement (b)

  • Themonetary unit assumptionwill be the correct answer for the given statement.

  • It states that the monetary unit is the most suitable basis for reporting the economic activities of the business entity. E.g. the US dollar rates are relatively stable; thus, the figures are not adjusted for inflation while reporting in the US.

04

Explanation for statement (c)

  • Thegoing concern assumptionwill be the correct answer for the given statement.

  • It states that the entity will continue its business for an unforeseeable future. Thus, the entity classifies its assets between current and non-current.

05

Explanation for statement (d)

  • The correct answer for the given statement will be theeconomic entity assumption.

  • It states that the economic activities of the business should be associated with a specific unit for establishing its accountability. For E.g. the economic activities of the entire group are reported since it forms a separate economic unit.

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Most popular questions from this chapter

According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.

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.

Why is it necessary to develop a definitional framework for the basic elements of accounting?

Identify which basic principle of accounting is best described in each item below.(a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.(b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.(d) Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

(Elements of Financial Statements) Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below.

Assets Distributions to owners Expenses Liabilities Comprehensive Income Gains Equity Revenues Losses Investments by owners

Instructions

Identify the element or elements associated with the 12 items below.(a) Arises from peripheral or incidental transactions.

(b) Obligation to transfer resources arising from a past transaction.

(c) Increases ownership interest.

(d) Declares and pays cash dividends to owners.

(e) Increases in net assets in a period from nonowner sources.

(f) Items characterized by service potential or future economic benefit.

(g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

(h) Arises from income statement activities that constitute the entity鈥檚 ongoing major or central operations.

(i) Residual interest in the assets of the enterprise after deducting its liabilities.

(j) Increases assets during a period through sale of product.

(k) Decreases assets during the period by purchasing the company鈥檚 own stock.(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.
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