资源描述
CHAPTER 7
Accounting Principles
ASSIGNMENT CLASSIFICATION TABLE
Brief
A
B
Study Objectives
1.
Explain the meaning of
Questions
1, 2
Exercises
1, 2
Exercises
Problems
Problems
generally accepted
accounting principles and
identify the key items of
the conceptual
framework.
2.
Describe the basic
3
3
objectives of financial
reporting.
3.
Discuss the qualitative
3, 4, 5
4, 5, 6
characteristics of
accounting information
and elements of financial
statements.
4.
Identify the basic
6
7
1, 2, 3
1A, 2A, 3A
1B, 2B, 3B
assumptions used by
accountants.
5.
Identify the basic princi-
7, 8, 9, 10,
7
1, 2, 3, 4
1A, 2A, 3A
1B, 2B, 3B
ples of accounting.
12
6.
Identify the two con-
11
7, 8
1, 2, 3
3A
3B
straints in accounting.
7.
Understand and analyze
13, 14, 15,
9, 10, 11
5, 6, 7, 8,
4A, 5A
4B, 5B
classified financial
statements.
16
9
8.
Explain the accounting
17, 18
10
principles used in inter-
national operations.
7-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Difficulty
Time
Number
1A
Description
Analyze transactions to identify accounting principle or
Level
Moderate
Allotted (min.)
20−30
assumption violated, and prepare correct entries.
2A
Determine the appropriateness of journal entries in
Moderate
20−30
terms of generally accepted accounting principles or
assumptions.
3A
Identify accounting assumptions, principles, and
Moderate
20−30
constraints.
4A
Prepare a classified balance sheet and analyze financial
Moderate
35−45
position.
5A
Prepare a multiple-step income statement and analyze
Moderate
35−45
profitability.
1B
Analyze transactions to identify accounting principle or
Moderate
20−30
assumption violated, and prepare correct entries.
2B
Determine the appropriateness of journal entries in
Moderate
20−30
terms of generally accepted accounting principles or
assumptions.
3B
Identify accounting assumptions, principles, and
Moderate
20−30
constraints.
4B
Prepare a classified balance sheet and analyze
Moderate
35−45
financial position.
5B
Prepare a multiple-step income statement and analyze
Moderate
35−45
profitability.
7-2
BLOOM'S TAXONOMY TABLE
7-3
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Knowledge
Q7-1
Q7-2
BE7-2
BE7-1
Comprehension
Application
Analysis
Synthesis
Evaluation
Study Objective
1.
Explain the meaning of gener-
ally accepted accounting
principles and identify the key
items of the conceptual
framework.
Q7-3
BE7-3
BE7-4
BE7-5
BE7-6
BE7-7
Q7-6
E7-1
E7-3
Q7-7
Q7-8
Q7-9
Q7-10
Q7-12
E7-1
E7-3
Q7-14
Q7-15
P7-3A
P7-3B
BE7-8
Q7-16
BE7-9
BE7-10
BE7-11
E7-5
E7-10
E7-6
E7-7
E7-8
E7-9
E7-1
E7-3
P7-3A
P7-3B
Q7-8
E7-4
E7-2
P7-1A
P7-2A
P7-1B
E7-2
Q7-13
E7-8
P7-4A
P7-5A
P7-4B
P7-5B
Q7-13
P7-4A
P7-5A
P7-4B
P7-3A
P7-3B
E7-2
P7-1A
P7-2A
P7-1B
P7-2B
P7-2B
Q7-3
Q7-4
Q7-5
2.
Describe the basic objectives
of financial reporting.
3.
Discuss the qualitative
characteristics of accounting
information and elements of
financial statements.
4.
Identify the basic assumptions
used by accountants.
BE7-7
5.
Identify the basic principles of
accounting.
Q7-11
BE7-7
Q7-18
Q7-17
6.
Identify the two constraints in
accounting.
7.
Understand and analyze
classified financial statements.
P7-5B
8.
Explain the accounting
principles used in international
operations.
Broadening Your Perspective
Communication Group Decision Interpreting
Financial Reporting
Financial
Case
Communication
Statements
Comp. Analysis
Research Case
A Global Focus Group Decision
Interpreting Financial
Case
Statements
Cookie Chronicle
Exploring the Web
Ethics Case
Group Decision Case
Comp. Analysis
Research Case
A Global Focus
Cookie Chronicle
ANSWERS TO QUESTIONS
1.
(a)
(b)
Generally accepted accounting principles (GAAP) are a set of standards and rules, having
substantial authoritative support, that are recognized as a general guide for financial
reporting.
The bodies that provide authoritative support for GAAP are the Financial Accounting Stan-
dards Board (FASB) and the Securities and Exchange Commission (SEC).
2.
3.
4.
5.
6.
7.
8.
9.
The FASB’s conceptual framework consists of the following:
(1) Objectives of Financial Reporting.
(2) Qualitative Characteristics of Accounting Information.
(3) Elements of Financial Statements.
(4) Operating Guidelines (Assumptions, Principles, and Constraints).
(a) According to the FASB in its development of the conceptual framework, the objectives of
financial reporting are to provide information that: (1) is useful to those making investment
and credit decisions, (2) is helpful in assessing future cash flows, and (3) identifies the eco-
nomic resources (assets), the claims to those resources (liabilities), and the changes in
those resources and claims.
(b) The qualitative characteristics are: (1) relevance, (2) reliability, (3) comparability, and (4)
consistency.
Curtis is correct. Consistency means using the same accounting principles and accounting meth-
ods from period to period within a company. Without consistency in the application of accounting
principles, it is difficult to determine whether a company is better off, worse off, or the same from
period to period.
Comparability results when different companies use the same accounting principles. Consistency
means using the same accounting principles and methods from year to year within the same
company.
The going concern assumption is necessary because otherwise depreciation and amortization
policies would not be justifiable and appropriate. Also, the current-noncurrent classification of
assets and liabilities would lose much of its significance. Labeling anything as fixed or long-term
would be difficult to justify. In addition, the going concern assumption lends credibility to the cost
principle.
Revenue should be recognized in the accounting period in which it is earned. The sales basis
involves an exchange transaction between the seller and buyer and the sales price provides an
objective measure of the amount of revenue realized.
Expired costs generate revenues only in the current period and therefore are expensed immedi-
ately. Unexpired costs will generate revenues in current and future periods and are recorded as
assets.
(a) The accountant discloses information about an entity’s financial position, operations, and
cash flows in the financial statements, or in the notes that accompany the statements.
(b) The trade-offs involved with disclosure balance the costs of preparing additional information
and the benefits from using it.
7-4
Questions Chapter 7 (Continued)
10.
11.
12.
13.
14.
15.
16.
17.
18.
Cost is used because it is both relevant and reliable. Cost is relevant because it represents the
price paid, the assets sacrificed, or the commitment made at the date of acquisition. Cost is
reliable because it is objectively measurable, factual, and verifiable. It is the result of an
exchange transaction. As a result, cost is the basis used in preparing financial statements.
The two constraints are materiality and conservatism. The materiality constraint means that an
item may be so small that failure to follow generally accepted accounting principles will not influ-
ence the decision of a reasonably prudent investor or creditor. The conservatism constraint
means that when in doubt, the accountant chooses the accounting method that is least likely to
overstate assets and net income.
Recording Osterhaus’ additional investment of $5,000 as revenues is inappropriate. An invest-
ment in a corporation increases the common stock account, not revenues.
Three relationships that are helpful in assessing profitability are: (1) the profit margin percentage
(or return on sales), (2) return on assets, and (3) return on common stockholders’ equity. More
than one profitability relationship is useful in that the relationships help in different types of analy-
sis. Return on sales, for example, measures the percentage of each sales dollar that is included
in net income, whereas return on assets measures the contribution of each dollar of assets in
generating income. The former, then, helps analyze profits in terms of revenues alone; the latter
helps analyze profits in terms of the asset base in generating sales and profits. If the return on
assets is lower than warranted, the company may not be using its assets effectively; if return on
sales is lower than warranted, the company may not be controlling costs effectively.
Natasha Company’s working capital (a) is $60,000 – $20,000 = $40,000, and its current ratio (b)
is $60,000 ÷ $20,000 = 3:1.
Whenever current assets are less than current liabilities, working capital is negative and the cur-
rent ratio will be less than 1:1. (Whenever current assets are greater than current liabilities,
working capital is positive and the current ratio is greater than 1:1.)
A debt to total assets ratio of 62% is fairly substantial. But more is involved in a credit decision
than just one financial statement relationship. Extension of additional credit will depend on
Bozeman’s overall liquidity (current ratio) and profitability (ability to generate revenue and cash)
over the life of the loan. Similarly, Bozeman’s credit history is important—its patterns of loan
repayment in the past. No one analytical relationship can provide sufficient information to deter-
mine granting of additional credit.
There is little uniformity in accounting standards from country to country, although some efforts
have been made in this area by the International Accounting Standards Committee.
The International Accounting Standards Committee establishes international accounting stan-
dards, although they are by no means universally applied.
7-5
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
(a) True.
(b) False.
(c) True.
BRIEF EXERCISE 7-2
(a) No.
(b) Yes.
(c) Yes.
BRIEF EXERCISE 7-3
(a) No.
(b) Yes.
(c) Yes.
BRIEF EXERCISE 7-4
(a)
(b)
(c)
(d)
(e)
Predictive value.
Feedback value.
Consistency.
Faithful representation.
Verifiable.
BRIEF EXERCISE 7-5
(a) Relevant.
(b) Reliability.
(c) Consistency.
7-6
BRIEF EXERCISE 7-6
(a)
(b)
(c)
(d)
1.
2.
3.
4.
BRIEF EXERCISE 7-7
(a)
(b)
(c)
(d)
2.
3.
1.
4.
BRIEF EXERCISE 7-8
(a)
(b)
(c)
(d)
Conservatism.
Conservatism.
Materiality.
Materiality.
BRIEF EXERCISE 7-9
Current Assets
Current Liabilities
Cash
Accounts receivable
Total
$ 110,600
1,674,400
$1,785,000
Accounts payable
Income taxes payable
Other current liabilities
Total
$ 584,600
25,900
608,500
$1,219,000
(a) Current ratio
= Current assets ÷ Current liabilities
= $1,785,000 ÷ $1,219,000
= 1.46:1
(b) Working capital = Current assets – Current liabilities
= $1,785,000 – $1,219,000
= $566,000
7-7
BRIEF EXERCISE 7-10
Gross profit
Income from operations
Other revenues and gains
Income before income taxes
Net income
BRIEF EXERCISE 7-11
$907,000
667,000 = Operating expenses (a)
240,000
36,000
276,000
96,600 = Income tax expense (b)
$179,400
Earnings per share
= Net income ÷ common shares outstanding
= $179,400 ÷ 46,000
= $3.90
7-8
SOLUTIONS TO EXERCISES
EXERCISE 7-1
1.
2.
3.
4.
5.
6.
7.
8.
Revenue recognition principle.
Full disclosure principle.
Matching principle.
Going concern assumption.
No violation.
Time period assumption.
Cost principle.
Economic entity assumption.
EXERCISE 7-2
(a) This is a violation of the cost principle. The inventory was written up to
its market value when it should have remained at cost. Thus, no jour-
nal entry should have been made.
(b) This is also a violation of the cost principle because the equipment
was recorded at its estimated market value and not its exchange value.
The correct journal entry is:
Equipment..............................................................................
Cash ................................................................................
41,000
41,000
(c) This is a violation of the economic entity assumption. The accounting
for the transaction treats Mark Nabke and Vicki Prowitz Company as
one entity when they are two separate entities. No journal entry should
have been made since Nabke should have used personal assets to
purchase the truck. If cash assets of the company were used, the debit
entry could be to Accounts Receivable—M. Nabke.
(d) This is a question of matching and materiality. The pencil sharpener
could be depreciated to match the expense with revenue since the
pencil sharpener has an estimated useful life of 5 years. However, the
pencil sharpener should not be depreciated because the cost of it is
not material. Since the cost of the sharpener is not material, it should
7-9
EXERCISE 7-2 (Continued)
be expensed immediately. The correct journal entry at the time of pur-
chase is:
Miscellaneous Expense .....................................................................
Cash.................................................................................................
EXERCISE 7-3
50
50
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
2.
1.
7.
3.
9.
4.
6.
5.
Going concern assumption.
Economic entity assumption.
Full disclosure principle.
Monetary unit assumption.
Materiality.
Time period assumption.
Matching principle.
Cost principle.
EXERCISE 7-4
1.
2.
3.
4.
$9,000. The full amount of the policy should be recognized as revenue
because the term expired within the current year.
$30,000 ÷ 12 = $2,500; $2,500 X
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