Qualitative Characteristics Relevance Timeliness Representational Reliability Verifiability Faithfulness Predictive Value Neutrality Comparability Feedback Value Consistency

Identify the appropriate qualitative characteristic(s) to be used given the information provided a) Same-industry companies use same accounting principles Comparability b) Quality of info that confirms users' earlier expectations Feedback Value c) Imperative for providing comparisons from period to period Consistency d) Ignores the economic consequences of a standard or rule Neutrality

e) Requires a high degree of consensus among indiv on a given mea Verifiability f) Predictive value is an ingredient of this primary quality of info Relevance

g) Two qualitative characteristics that are related to both relevance a Comparability, Consistency

h) Neutrality is an ingredient of this primary quality of accounting inf Reliability

i) Two primary qualities that make accounting info useful for decisio Relevance, Reliability

j) Issuance of interim reports is an example of what primary ingredie Timeliness

esentational Faithfulness parability stency

eristic(s) to be ded

nting principles

xpectations

period to period

andard or rule

g indiv on a given measurement

ary quality of info

ed to both relevance and reliability

uality of accounting info

info useful for decision-making

what primary ingredient of relevance?

Which basic assumption of accounting is best described b

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

6 5 7 2 11 1 4 10 9 3

Matching principle. Historical cost principle. Full disclosure principle. Going concern assumption. Conservatism. Economic entity assumption. Periodicity assumption. Industry practices. Materiality. Monetary unit assumption.

g is best described by the below?

p. 49

GAAP Appropriateness a) Miscellaneous Expense Cash (Personal Suburban)

This entry violates the economic entity assumption. This assumption indicates that economic activity can be identified with a particular unit of accountability. In this situation, the company erred by charging this cost to the wrong economic entity.

b)

Merchandise Inventory Revenue (Gain on inventory's expected selling price less selling costs) The historical cost principle indicates that assets and liabilities are accounted for on the basis of cost. Example: Sales value cannot be determined without selling an item. ALSORevenue Recognition shows when revenue should be recognized (when (a) realized/realizable and (b) earned). Here, an earnings process did not happen

c)

Loss from Lawsuit Liability for Lawsuit (Preemptive entry just in case company loses lawsuit-unlikely) Matching Principle: Expenses are allocated in the appropriate period. Here, it is uncertain that payment will be required. FASB Statement No. 5 requires that a loss should be accrued only (1)when it is probable that the company would lose the suit and (2) there is a reasonable estimate of the amount of loss

d)

Depreciation Expense Accumulated Depreciation (Understatement of dep. Exp. b/c general level of price incr.)

Long life assumption (going concern) lends credibility to the Historical Cost principle-where liquidation is not an assumption. Expectation of long life justifies use of amortization and depreciation policies. Knowing this, assuming liquidation is incorrect in this case. As a side: When liquidation is imminent, Going Concern is inapplicable.

e)

Retained Earnings Goodwill (Purchase brought goodwill, recorded to show cash value) Most accounting methods are based on the assumption that the business enterprise will have a long life. Acceptance of this assumption provides credibility to the historical cost principle, which would be of limited usefulness if liquidation were assumed. Only if we assume some permanence to the enterprise is the use of depreciation and amortization policies justifiable and appropriate. Therefore, it is incorrect to assume liquidation as Fresh Horses, Inc. has done in this situation. It should be noted that only where liquidation appears imminent is the going concern assumption inapplicable.

f)

Equipment Cash Revenue (Equipment was purchased well below fair value) The historical cost principle indicates that assets and liabilities are accounted for on the basis of cost. If we were to select sales value, for example, we would have an extremely difficult time in attempting to establish a sales value for a given item without selling it. It should further be noted that the revenue recognition principle provides the answer to when revenue should be recognized. Revenue should be recognized when (1) realized or realizable and (2) earned. In this situation, an earnings process has definitely not taken place. [This is the same as (b) above]

29,000 29,000

70,000 70,000

s expected elling costs)

### ###

just in case suit-unlikely)

16,000 16,000

f dep. Exp. f price incr.)

### ###

goodwill, ash value)

### ### 45,000

Adjusting Entries, Duggan Rental Prepaid Insurance Supplies Equipment Accum. Depr. - Equipment Notes Payable Unearned Rent Revenue Rent Revenue Interest Expense Wage Expense Debit 3,600 2,800 25,000 Credit

8,400 20,000 9,300 60,000 -014,000

Accounts analysis finds: 1 Equipment depreciates at $250 per month 2 One-third of unearned rent was earned during the quarter 3 Interest of $500 is accrued on notes payable 4 Supplies on hand total $850 5 Insurance expires at the rate of $300 per month Prepare adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are Depreciation Expense; Insurance Expense; Interest Payable; and Supplies Expense. Omit explanations. 1 Depreciation Expense - Equipment Accumulated Depreciation - Equip. Unearned Rent Revenue Rent Revenue Interest Expense Interest Payable Supplies Expense Supplies 750 750 3,100 3,100 500 500 1,950 1,950

Insurance Expense Prepaid Insurance

900 900