Question 1: Read the Analysis case study then answer the questions below it.
Financial Statement Analysis Case
Wal-Mart Stores, Inc.
Wal-Mart Stores, Inc. provided the following disclosure in a recent annual report.
New accounting pronouncement (partial) ... the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). This SAB deals with various revenue recognition issues, several of which are common within the retail industry. As a. result of the issuance of this SAB ... the Company
is currently evaluating the effects of the SAB on its method of recognizing revenues related to layaway sales and will make any accounting method changes necessary during the first quarter of [next year].
In response to SAB 101, Wal-Mart changed its revenue recognition policy for layaway transactions, in which Wal-Mart sets aside merchandise for customers who make partial payment. Before the change, Wal-Mart recognized all revenue on the sale at the time of the layaway. After the change, Wal-Mart does not recognize revenue until customers satisfy
all payment obligations and take possession of the merchandise.
Instructions
(a) Discuss the expected effect on income (1) in the year that Wal-Mart makes the changes in its revenue recognition policy, and (2) in the years following the change.
(b) Evaluate the extent to which Wal-Mart's previous revenue policy was consistent with the revenue recognition principle.
(c) If all retailers had used a revenue recognition policy similar to Wal-Mart's before the change, are there any concerns with respect to the qualitative characteristic of comparability? Explain.
Question 2:
Assignment consists of a number of question that are Highlightedas follows:
Read the questions then answer them correctly and make sure there are NO grammatical errors.
• Match the qualitative characteristics below with the following statements.
1.Timeliness
2.Completeness
3.Free from error
4.Understandability
5.Faithful representation
6.Relevance
7.Neutrality
8.Confirmatory value
(a) Quality of information that assures users that information represents the economic phenomena that it purports to represent.
(b) Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.
(c) The extent to which information is accurate in representing the economic substance of a transaction.
(d) Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.
(e) Quality of information that allows users to comprehend its meaning.
• Identify which qualitative characteristic of accounting information is best described in each item below.
(Do not use relevance and faithful representation.)
(a) The annual reports of Best Buy Co. are audited by certified public accountants.
(b) Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption.
(c) Starbucks Corporation has used straightline depreciation since it began operations.
(d) Motorola issues its quarterly reports immediately after each quarter ends.
• For each item below, indicate to which category of elements of financial statements it belongs.
(a) Retained earnings
(b) Sales
(c) Additional paidin capital
(d) Inventory
(e) Depreciation
(f) Loss on sale of equipment
(g) Interest payable
(h) Dividends
(i) Gain on sale of investment
(j) Issuance of common stock
• (Usefulness, Objective of Financial Reporting, Qualitative Characteristics)
Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.
(a)The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability.
(b)Relevant information only has predictive value, confirmatory value, or both.
(c)Information that is a faithful representation is characterized as having predictive or confirmatory value.
(d)Comparability pertains only to the reporting of information in a similar manner for different companies.
(e)Verifiability is solely an enhancing characteristic for faithful representation.
(f)In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.
• (Qualitative Characteristics)
The qualitative characteristics that make accounting information useful for decisionmaking purposes are as follows.
Relevance Neutrality Verifiability
Faithful representation Completeness Understandability
Predictive value Timeliness Comparability
Confirmatory value Materiality Free from error
Instructions
Identify the appropriate qualitative characteristic(s) to be used given the information provided below.
(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.
(b) Quality of information that confirms users' earlier expectations.
(c) Imperative for providing comparisons of a company from period to period.
(d) Ignores the economic consequences of a standard or rule.
(e) Requires a high degree of consensus among individuals on a given measurement.
(f) Predictive value is an ingredient of this fundamental quality of information.
(g) Four qualitative characteristics that are related to both relevance and faithful representation.
(h) An item is not recorded because its effect on income would not change a decision.
(i) Neutrality is an ingredient of this fundamental quality of accounting information.
(j) Two fundamental qualities that make accounting information useful for decisionmaking purposes.
(k) Issuance of interim reports is an example of what enhancing quality of relevance?
• (Assumptions, Principles, and Constraint)
Presented below are the assumptions, principles, and constraint used in this chapter.
1.Economic entity assumption
2.Going concern assumption
3.Monetary unit assumption
4.Periodicity assumption
5.Measurement principle (historical cost)
6.Measurement principle (fair value)
7.Expense recognition principle
8.Full disclosure principle
9.Cost constraint
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 "measuring stick" used to report on financial performance.