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Financial Accounting,5eJohn Wiley&Sons,Inc.1CHAPTER 7ACCOUNTING PRINCIPLESSTUDY OBJECTIVESAfter studying this chapter,you should understand:2STUDY OBJECTIVE 1GAAP&CONCEPTUAL FRAMEWORKCollaborate3GAAP&CONCEPTUAL FRAMEWORK4STUDY OBJECTIVE 2FINANCIAL REPORTING OBJECTIVES5STUDY OBJECTIVE 3QUALITATIVE CHARACTERISTICS6RELEVANCE7RELIABILITY8COMPARABILITY9CONSISTENCY20002001200210STUDY OBJECTIVE 4BASIC ACCOUNTING ASSUMPTIONS11 MONETARY UNIT ASSUMPTION12 ECONOMIC ENTITYASSUMPTION13QTR 1QTR 2QTR 3QTR 42003 2005 2007 JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC TIME PERIOD ASSUMPTION14 GOING CONCERN ASSUMPTION15STUDY OBJECTIVE 5BASIC ACCOUNTING PRINCIPLES16REVENUE RECOGNITION PRINCIPLE17MATCHING PRINCIPLE18Benefits DecreaseProvides FutureBenefitProvides No Apparent FutureBenefitsEXPENSE RECOGNITION PATTERN19Business insight on page 298.20FULL DISCLOSURE PRINCIPLE21Is the more disclosure the better?22e Business insight on page 299.23COST PRINCIPLE24What are some criticism of cost principle?25Revenue RecognitionDuringproductionAt endof productionAt point of saleAt timecash receivedRevenue should be recognized in the accounting period in which it is earned(generally at point of sale).MatchingAdvertising UtilitiesDeliveryCosts Matching Sales RevenueMaterialsLaborOperating ExpensesExpenses should be matched with revenuesCEMENTCostAssets should be recorded at cost.Full DisclosureCircumstances and events that make a difference to financial statement users should be disclosed.*Financial Statements*Balance Sheet*Income Statement*Retained Earnings Statement*Cash Flow StatementBASIC ACCOUNTING PRINCIPLES26Materiality$For small amounts,GAAP does not have to be followed.ConservatismWhen in doubt,choose the solution that will be least likely to overstate assets and income.BASIC ACCOUNTING CONSTRAINTSStudy Objective 627Examples of materiality constraint?28Examples of conservatism constraints we learned?29SUMMARY OF CONCEPTUAL FRAMEWORKObjectives of Financial ReportingAssumptionsPrinciplesOperating GuidelinesQualitative Characteristics of Accounting InformationElements of Financial Statements30REVIEW QUESTION31STUDY OBJECTIVE 7ANALYZING CLASSIFIED FINANCIAL STATEMENTS32How do the balance sheet of a proprietorship and partnership look like?33ANALYZING CLASSIFIED FINANCIAL STATEMENTS34INCOME STATEMENT WITH TAX EXPENSE35Adjusting entry for income tax?36REVIEW QUESTION37EARNINGS PER SHARE38EPS is reported below net income.39FINANCIAL STATEMENTSGENLYTE,INC.40FINANCIAL STATEMENTSGENLYTE,INC.41Three major characteristics are evaluatedANALYZING FINANCIAL STATEMENTS42LIQUIDITY43Is current ration the higher the better?44ProfitabilityROS-Profit margin percentage45Business insight on page 30746PROFITABILITY47SOLVENCY48SolvencyAsset liability management49STUDY OBJECTIVE 8INTERNATIONAL OPERATIONS50International insight on page 309.Uniformity in standards(IASB)51Demonstration problem 152Demonstration problem 253HomeworkProblems:P7-1A54ExercisesTo be relevant,accounting information musta.improve the companys internal control.b.be presented on the balance sheet.c.be recorded at historical cost.d.be capable of making a difference in a decision.d55The matching principle states that a.revenues should be matched with assets when they are recorded.b.revenues should be matched with the periods when cash is collected from customers.c.recorded values of assets should match their purchase prices.d.none of the above.d56In accounting,conservatism meansa.choose the solution that will understate assets or income.b.choose the solution that will be least likely to overstate assets or income.c.choose the solution that will reduce expenses,thereby increasing income.d.voting Republican.b57The concept of consistency a.means that only one method of inventory accounting should be allowed.b.is the primary motivation for fighting inflationc.suggests that companies should use the same set of accounting principles each year.d.implies that companies should use a single useful life for depreciating all of their assets.c58
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