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BE2-9 (L05) If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in thefinancial statements for the following items.

(a) Land. (d) Inventory.

(b) Unamortized bond premium. (e) Prepaid insurance.(c) Depreciation expense on equipment.

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.

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

Revenues, gains, and investments by owners are all increasing in net assets. What are the distinctions among them?

What are the four basic assumptions that underlie the financial accounting structure?

(Usefulness, Objective of Financial Reporting) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.

1. Accounting rule-making that relies on a body of concepts will result in useful and consistent pronouncements.
2. General-purpose financial reports are most useful to company insiders in making strategic business decisions.
3. Accounting standards based on individual conceptual frameworks generally will result in consistent and comparable accounting reports.
4. Capital providers are the only users who benefit from general-purpose financial reporting.
5. Accounting reports should be developed so that the users without knowledge of economics and business can become informed about the financial results of a company.
6. The objective of financial reporting is the foundation from which the other aspects of the framework logically result.

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?

Statement of Financial Accounting Concepts No.5 identifies four characteristics that an item must have before it is recognized in the financial statements. What are these four characteristics?

Match the qualitative characteristics below with the following statements.1. Timeliness 5. Faithful representation2. Completeness 6. Relevance3. Free from error 7. Neutrality4. Understandability 8. Confirmatory value

1. Quality of information that assures users that information represents the economic phenomena that it purports to represent.
2. Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.
3. The extent to which information is accurate in representing the economic substance of a transaction.
4. Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.
5. Quality of information that allows users to comprehend its meaning.

What is meant by term 鈥渜ualitative characteristics of accounting information鈥�?