ACCOUNTING
ACCOUNTING
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Instructions
Identify by number the accounting assumption, principle, or constraint that describes each situation below.
Do not use a number more than once.
a. Is the rationale for why plant assets are not reported at liquidation value. (Do not use the cost principle.)
b. Indicates that personal and business record-keeping should be separately maintained.
c. Ensures that all relevant financial information is reported.
d. Assumes that the dollar is the “measuring stick” used to report on financial performance.
e. Requires that accounting standards be followed for all significant items.
f. Separates financial information into time periods for reporting purposes.
g. Requires recognition of expenses in the same period as related revenues.
h. Indicates that fair value changes subsequent to purchase are not recorded in the accounts.
1 Economic entity assumption
2. Expense recognition principle
3. Monetary unit assumption
4. Periodicity assumption
5. Cost principle
6. Materiality constraint
7. Full disclose principle
8. Going concern principle
9. Revenue recognition
10. Cost Constraint
Exercise 4-3
Identify the violated assumption, principle,or constraint.
Here are some accounting reporting situations.
a. Dorfner Company recognizes revenue at the end of the production cycle but before sale. The price of the product, as well as the amount that can be sold, is not certain.
b. Rayms Company is in its fifth year of operation and has yet to issue financial statements. (Do not use the full disclosure principle.)
c. Tariq, Inc. is carrying inventory at its original cost of $100,000. Inventory has a fair value of $110,000.
d. Leer Hospital Supply Corporation reports only current assets and current liabilities on its balance sheet. Property, plant, and equipment and bonds payable are reported as current assets and current liabilities, respectively. Liquidation of the company is unlikely.
e. Kim Company has inventory on hand that cost $400,000. Kim reports inventory on its balance sheet at its current fair value of $425,000.
f. Kris Piwek, president of Classic Music Company, bought a computer for her personal use. She paid for the computer by using company funds and debited the “Computers” account.
Instructions For each situation, list the assumption, principle, or constraint that has been violated, if any. Some of these assumptions, principles, and constraints were presented in earlier chapters. List only one answer for each situation.
