Demonstrate your ability to identify the basic assumptions, principles, and desired qualitative characteristics of financial reporting and accounting information. Listed below are the accounting assumptions, principles, and qualitative characteristics contained in the FASB’s Conceptual Framework for financial reporting.
A Periodicity assumption
B Monetary unit assumption
C Going concern assumption
D Economic entity assumption
E Full disclosure principle
F Revenue recognition principle
G Historical cost principle
H Matching principle
I Comparability (incl. Consistency)
J Representational faithfulness
K Relevance
L Materiality
M Conservatism
Provide the letter corresponding to the SINGLE, PRIMARY assumption, principle, or qualitative characteristic that corresponds with each of the following statements. Hint: Use only one of these concepts (letters) twice.
1. A company’s FS footnotes provide a detail listing of items comprising total selling and administrative expense, reported only in total within the income statement.
2. A company’s FS exclude the separate assets, liabilities, and operating results of a business in which it holds a 10 percent equity interest and over which it does not exercise significant influence.
3. Management prepares a company’s FS using the accrual basis of accounting.
4. A company’s interim FS include an accrual for part of anticipated yearend manager bonuses, even though interim (mid-year) income has not reached the mandated minimum required for any bonuses.
5. A company adopts properly designed internal controls over the approval and processing of transactions recognized in its accounting systems and tests the efficacy of those controls annually.
6. A company’s FS describe the assumptions managers used to determine the amounts of inventory and accounts receivable valuation allowances recognized in the balance sheet.
7. In its income statement, a company reports total sales in terms of their value, rather than their physical attributes (e.g., number of units, volume, weight, function, etc.)
8. A company presents its recognized assets and liabilities in a classified balance sheet, rather than an expected order-of-liquidation balance sheet.
9. A company recognizes product manufacturing costs as inventory (in the balance sheet) until it sell the related goods.
10. A company defers immediate recognition of profit from customers’ purchases of annual memberships even though customers’ annual dues are paid in advance and not refundable.
11. A company recognizes immediately a loss resulting from an anticipated adverse judgment in a lawsuit by an injured employee, but does not recognize the anticipated recovery under a related insurance policy.
12. Management decided not to correct a company’s FS for a prematurely recorded sale that it discovered immediately before it was to issue the FS because the overstatement represented 0.03% of total sales.
13. A company reports its obligation to repay bonds it issued a year ago at their principal balance (par value), even though the quoted market price of the company’s bonds has risen to 103% of par value.
14. In each of the past 3 years, a company applied the “percent of sales” approach to determine the amount of the provision (expense) for anticipated uncollectible accounts receivable recognized in its FS.