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Chapter 2: Q10BE (page 64)

BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.

  1. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
  2. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
  3. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
  4. Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

Short Answer

Expert verified

(a) Revenue recognition

(b) Matching principle

(c) Full disclosure

(d) Historical cost

Step by step solution

01

Definition of revenue

Revenue is an income to the company arising due to normal course of business activities. Generally, it will occur by giving services to customers and sale of goods, and some companies getting this revenue from interest, fees and royalties.

02

(a) Revenue recognition principle

Reason - Revenue is recognized in the period it is earned (GAAP)

Revenue recognition principle: Revenue is recognized for accounting records as and when the related performance obligation is complete. The performance obligation arises if a company sells a product or provides service to its customer. Once the performance obligation is satisfied by a company it should record revenue in the respective accounting period.

03

(b) Matching principle:

Under the matching principle in accrual basis accounting, expenses are matched with the benefits derived from the expense in the same income statement period. Expenses, which do not pertain to a period, are excluded from reporting in the period.

Reason - Expense is matched with the period revenue is earned.

04

(c) Full Disclosure principle

Reason - Pending lawsuit is disclosed to its investor as a foot note.

Full disclosure about all the disputes and conflicts against the company need to be shown and other perceived problems and liabilities and legal issues need to be disclosed in order to maintain transparency.

05

(d) Historical cost

Accounting is concerned with past events and it requires consistency and comparability that is why it requires the accounting transactions to be recorded at their historical costs. This is known as historical concept.

Reason - Cost in the balance sheet is the cost it acquired.

Historical cost is the cost, which is there on the day of transaction, which is the past event cost.

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Most popular questions from this chapter

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.

a) Legal fees paid in connection with the purchase of land are \(1,500.

b) Eduardo, Inc. paves the driveway leading to the office building at a cost of \)21,000.

c) A meat market purchases a meat-grinding machine at a cost of \(3,500.

d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.

e) Smith's Hardware Company pays \)9,000 in wages to laborers for construction on a building to be used in the business.

f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.

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.

(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.

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?

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