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Exam 14: Accounting Principles and Reporting Standards

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Question 21

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Define the two aspects of the monetary unit assumption.

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1. Expressing financial facts ...

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Question 22

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The Garrison Company offers terms of net 30 days for its credit sales. It records the revenue from these sales as soon as the sales are made rather than waiting until cash is received from the customers. This is an example of the

A) realization principle.
B) matching principle.
C) conservatism principle.
D) consistency principle.

E) None of the above
F) A) and B)

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Question 23

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A deviation from generally accepted accounting principles is

Paige Turner Publishing's employees worked the last 3 days of December 2013, that they will not be paid for until January 2014. According to the matching principle, Paige Turner Publishing should recognize the wages expense for the last 3 days of 2013

Which of the following statements is correct?

Lack of ____________________ would result in financial reports that are not comparable with earlier statements.

The ____________________ assumption, which assumes that a firm will continue to operate indefinitely, permits carrying forward a portion of the cost of assets that will be used in future periods.

Define and give an example of all modifying constraints on accounting principles.

If an expenditure that is expected to benefit future periods is made during one accounting period, the cost should be divided and charged as an expense during each period benefited.

Most businesses follow the general rule that revenue is recognized when cash is received.

The ____________________ principle requires that if income is to be properly measured, all expired costs associated with the earning of revenue must be deducted from the revenue in the same accounting period.

The concept of realization permits a company to recognize income whenever there is an increase in the market value of the assets it holds.

For convenience, accountants assume that the value of money is stable or that changes in its value are not great enough to affect the recorded financial data.

Which of the following important types of documents are not issued by the Accounting Standards Executive Committee?

Indicate in each case whether the item has been handled in accordance with generally accepted accounting principles (GAAP). If so, indicate the key basic concept that has been followed. If not, indicate which concept has been violated and tell how the item should have been recorded or presented. 1. White Farm Equipment Company manufactures tractors and combines. It pays its salespeople a commission of 15 percent of the sales price as their compensation. During the current year, the company's sales were $100,000,000 and commissions amounted to $15,000,000. In the income statement, sales are shown as $100,000,000, but the $15,000,000 in commissions was not recorded in the current year as it will not be paid until the next year. 2. Plato Plastics Molding uses a large quantity of small tools in its manufacturing process. The annual purchases of the tools, which have a life of about two years, are approximately 1 percent of the company's net income for the year. The company has followed the practice of capitalizing the cost of the tools and depreciating the cost over two years. The owner asks why the accountant spends so much time on "bookkeeping" and tells her to simply charge the tools to expense when they are purchased. The accountant agrees. 3. Lauren Fox owns a snow removal business in Maine. Customers who will be vacationing in Florida for the winter must make a deposit of one-half of the seasonal rate on September 1, the last date to make arrangements to have their sidewalks and driveways plowed throughout the winter while they are gone. The balance is due on November 1. At the time deposits are received, Fox records them as revenue. Refunds, if any, are treated as expenses at the time they are made. 4. The Dollar Store sells such items as discontinued products and merchandise purchased from bankrupt companies. Freight costs on goods purchased are quite high. The company adds the freight costs to the purchase price and treats the total as cost of its merchandise inventory. 5. Each year, Neuman Enterprises has a large number of uncollectible accounts. Neuman charges uncollectible accounts to expense when they are deemed to be uncollectible. On the average, an account is deemed to be uncollectible about 18 months after the due date of the account.

The concepts of objectivity and verifiability eliminate subjective decisions.

Which of the following statements is NOT true?

Because financial statements must be objective and based on verifiable evidence, data obtained from estimates cannot be presented.

If an important fact that would have an effect on an investor's decisions is omitted from the financial statements, the ____________________ principle has been violated.

Financial accounting rules affect the recording of data used to prepare financial reports that go to ____________________ and creditors.