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Exam 14: Accounting Principles and Reporting Standards

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Question 41

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Select the statement below that does not correctly describe the qualitative characteristic of Reliability.

A) Reliable information should be compared with the same data for other companies.
B) Reliability means that the information should be dependable.
C) Information that is reasonably free of error and bias is assumed to be reliable.
D) Reliable information is a faithful representation of the company's financial affairs.

E) A) and B)
F) All of the above

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Question 42

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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.

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1. No; revenue recognition principle, ma...

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Question 43

Multiple Choice

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The Financial Accounting Standards Board is

Each year there was an increase in the market value of some of the stock owned by the Mudstream Company, but the accountant did not record the increase in the asset's value and equity until the stock was sold. In this situation, the accountant

Under the ________ basis of accounting, income is recorded in the period in which it is earned.

Hour Place Clock Repair paid $2,400 cash in advance for a one year insurance policy. According to the matching principle, if 5 months of the policy has expired by the balance sheet date, how much should Hour Place Clock Repair report as Prepaid Insurance?

Under the accrual basis of accounting

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

What two tests must be met in order for revenues to be recognized?

Identify the statement below that is incorrect.

Carlos Verde owns a small nursery. He recently approached the local bank for a loan to finance an expansion of his nursery. Carlos prepared the balance sheet given below and submitted it with his loan application. The balance sheet does not conform to generally accepted accounting principles. Using the additional information provided by the owner, prepare a corrected balance sheet in accordance with generally accepted accounting principles. VERDE GARDEN SPOT Balance Sheet December 31, 2019 Additional information provided by owner: 1. The inventory has an original cost of $42,000. It is listed on the balance sheet at what it would cost to purchase today. 2. Included in the cash listed on the balance sheet is $4,000 in Carlos Verde's personal checking account. 3. Depreciation allowable to date on the equipment is $5,000. Depreciation allowable to date on the truck is $3,000.

In order to ensure they are meaningful and useful, financial statements should be prepared

The New York Mets entered into a vendor contract with Immaculate Landscaping to maintain their field for the entire season and paid the full contract fee in advance, expensing the full amount at the time of payment, which is

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 .

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 accountant records an expense for wages earned by employees during the last four days of the year, even though the wages will not be paid in that year. The accountant is following the________ principle.

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. A piece of machinery has a book value (cost less accumulated depreciation)of $90,000. However, the machinery could not be sold for more than $70,000 today. The company's owner thinks that the machinery should nevertheless be reported on the balance sheet at $90,000 and depreciated over its useful life, because the equipment is being used regularly in the business and it is expected to be used for the next five years-the remaining useful life that is being used for depreciation purposes. 2. At the beginning of the year, the company bought a building for $1,000,000. At the end of the year, the building's value was appraised at $1,220,000. Since there was an increase in value, the company did not record depreciation on the building. 3. The assets listed in the accounting records of the company, which is operated as a sole proprietorship, include a savings account of the owner of the business. The owner established the savings account so that if she needs to invest more cash in the business, it will be readily available. 4. Three years ago, the company paid for a three-year insurance policy on its automobiles by writing a check for $6,000. At the end of the current year, the balance sheet of the company reported prepaid insurance at $6,000.

The modifying constraint of ________ concerns the monetary or financial significance of an item in relation to the particular monetary or financial situation of which it is a part.

The financial statements in the annual report of a corporation contain footnotes explaining the methods used to depreciate the firm's equipment. This practice is an example of

In its conceptual framework, the FASB concluded that financial reporting rules should concentrate on providing information that is helpful to