Task: (Assumptions, Principles, and Constraints) Presented below are assumptions, principles, and constraints:
1. Economic entity assumption 5. Historical cost principle 9. Materiality
2. Going concern assumption 6. Matching principle 10. Industry practices
3. Monetary unit assumption 7. Full disclosure principle 11. Conservatism
4. Periodicity assumption 8. Cost-benefit relationship
Select the assumption, principle or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)
1. Marker value changes are not recognized in the accounting record
2. Lower of cost or market is used to value inventories
3. Financial information is presented so that investors will not be misled
4. Intangible assets are capitalized and amortized over period benefitted
5. Repair tools are expensed when purchased
6. Agricultural companies use market value for purposes of valuing crops
7. Each enterprise is kept as a unit distinct for its owner or owners
8. All significant post balance sheet events are reported
9. Revenue is recorded at point of sale
10. All important aspects of indentures are presented in financial statements
11. Rationale for accrual accounting
12. The use of consolidated statements is justified
13. Reporting must be done at a defined time intervals
14. An allowance of doubtful accounts is established
15. All payments our of petty cash are charged to Miscellaneous expense ( do not use conservatism)
16. Goodwill is recorded only at time of purchase
17. No profits are anticipated and all possible losses are recognized
18. A company charges its sales commission costs to expense
Use Qualitative Characteristics:
Problem 1. What is the quality of information that enables users to confirm or correct prior expectations
Problem 2. Identify the two overall or pervasive constraints developed in SFAC No. 2
Problem 3. "If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information will be undermined." Which qualitative characteristic will not occur?
Problem 4. Switches for FIFO to average to LIFO in a two year period. Which qualitative characteristic is not followed
Problem 5. A savings and loan industry defers losses on investments it sells, because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic is not followed
Problem 6. What are the two primary qualities that make accounting information useful for decision-making
Problem 7. A company does not record its first-quarter report until after its second quarter is reported. Which qualitative characteristic is not followed
Problem 8. Predictive value is an ingredient of which of the two primary qualities that make accounting information useful for decision making purposes
Problem 9. A company is the only company in its industry to depreciate its plants assets on a straight-line basis. Which qualitative characteristic is not followed