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FINA 4358-CHAPTER 1 QUIZ

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FINA 4358-CHAPTER 1 QUIZ

FINA 4358-CHAPTER 1 QUIZDiscuss the role of each of the following in the formulation of accounting principles: a. American Institute of Certified Public Accountants – important role in the private sector in establishing GAAP b. Financial Accounting Standards Board – a basis for evaluating ...

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fina 4358 chapter 1 quiz chapter 1 introduction to financial reporting homework q 1 1 discuss the role of each of the following in the formulation of accounting principles a american institute of c

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FINA 4358-CHAPTER 1 QUIZ
Chapter 1 Introduction to Financial Reporting Homework

Q 1-1. Discuss the role of each of the following in the formulation of accounting principles:

a. American Institute of Certified Public Accountants – important role in the private sector in
establishing GAAP
b. Financial Accounting Standards Board – a basis for evaluating the existing standards of
financial accounting and reporting
c. Securities and Exchange Commission – regulate securities trading in national exchanges,
determine GAAP and regulate accounting profession.

Q 1-3. The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked
into your office and said, “A year ago we bought a piece of land for $100,000. This year, inflation has
driven prices up by 6%, and an appraiser just told us we could easily resell the land for $115,000. Yet our
balance sheet still shows it at $100,000. It should be valued at $115,000. That’s what it’s worth. Or, at a
minimum, at $106,000.” Respond to this statement with specific reference to the accounting principles
applicable in this situation.

Historical cost concept because the valuation of the asset doesn’t change the balance sheet value.

Q 1-5 A corporation like General Electric has many owners (stockholders). Which concept enables the
accountant to account for transactions of General Electric separate and distinct from the personal
transactions of the owners of General Electric?

The concept separate enables the accountant to account for separate and distinct because this concept
states that business is separate from entity of owner.

Q 1-7 Because of assumptions and estimates that go into the preparation of financial statements, the
statements are inaccurate and are, therefore, not a very meaningful tool to determine the profits or
losses of an entity or the financial position of an entity. Comment.

Because there’s no alternative to using the financial statements, we have to use those statements that
are a little bit inaccurate

Q 1-9 Describe the following terms, which indicate the period of time included in the financial
statements:

a. Natural business year – ends when operations are at low frequency, usually on December 31

b. Calendar year – end on 31st December

c. Fiscal year – closing at the end of a month any other than December

Q 1-11 Countries have had problems with the stability of their money. Briefly describe the problem
caused for financial statements when money does not hold a stable value.

, When money doesn’t hold a constant value, the financial statements cant be compared because the
measure of money isn’t the same.

Q 1-13 An arbitrary write-off of inventory can be justified under the conservatism concept. Is this
statement true or false? Discuss.

I think its false because an arbitrary write off cannot be used when there isn’t a good reasonable excuse.
The conservatism concept isn’t enough to justify.

Q 1-15 There are other acceptable methods of recognizing revenue when the point of sale is not
acceptable. List and discuss the other methods reviewed in this chapter, and indicate when they can be
used.

Cost recovery – for high speculative transactions and can be used when revenue is considered as a
return of investment

Receipt of cash – used when collection of cash receipts does not give reasonable estimation at the time
of sale

End of production and during production – EOP is used when revenue is received when project is
completed vs DP is used when revenue is recognized during the project

Q 1-17 The consistency concept requires the entity to give the same treatment to comparable
transactions from period to period. Under what circumstances can an entity change its accounting
methods, provided it makes full disclosure?

If there’s a justification to changing its accounting methods, the change can be made even though it is
recommended that same accounting principles are followed.

Q 1-19 No estimate or subjectivity is allowed in the preparation of financial statements. Discuss.

Yes it is true. Preparing financial statements should always be subjective.

Q 1-21 The same generally accepted accounting principles apply to all companies. Comment.

It applies to most companies, but for some companies that are difficult to measure the cost/revenue
because of certain projects, they use other accounting procedures.

Q 1-23 Some industry practices lead to accounting reports that do not conform to the general theory
that underlies accounting. Comment.

Yes some businesses that cannot determine certain aspects of the general theory accounting, they have
to use a different accounting principle

Q 1-25 Why did the FASB commence the Accounting Standards CodificationTM project?

FASB commence the accounting standards codificationTM project to establish the standards of
accounting to the public.

Q 1-27 At which point is revenue from sales on account (credit sales) commonly recognized?

It is recognized at the point of sale.

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