Unit 6 GAAP Application-Conceptual Framework of Accounting The Conceptual Framew
ID: 2376664 • Letter: U
Question
Unit 6 GAAP Application-Conceptual Framework of Accounting The Conceptual Framework allows for the systematic adaptation of accounting standards to a changing business environment. The FASB uses the conceptual framework to aid in an organized and consistent development of new accounting standards. The conceptual framework outlines the objectives of financial reporting and the qualities of good accounting information, precisely defines commonly used terms such as asset and revenue, and provides guidance about appropriate recognition, measurement, and reporting. Understanding the terminology associated with the framework is imperative. Match the numbered statements below with the lettered terms. An answer (letter) may used more than once, and some terms require more than one answer (letter).
1. Key ingredients in quality of relevance.
2. Traditional assumptions that influence the FASB's conceptual framework.
3. The idea that information should represent what it purports to represent.
4. An important constraint relating to costs and benefits.
5. An example of conservatism
6. The availability of information when it is needed.
7. Recording an item in the accounting records.
8. Determines the threshold for recognition.
9. Implies consensus.
10. Transactions between independent parties.
a) Cost-effectiveness
b) Representational faithfulness
c) Recognition
d) Verifiability
e) Time periods
f) Unrealized
g) Completeness
h) Timeliness
i) Materiality
j) Predictive value
k) Economic entity
l) Lower-of-cost-or-market rule
m) Phrenology
n) Arm's-length transactions
Now that you have reviewed the terminology, for each situation listed below, indicate by letter the appropriate qualitative characteristic(s) or accounting concept(s) applied. A letter may be used more than once, and more than one characteristic or concept may apply to a particular situation. Explain why you chose your answer.
1. Goodwill is recorded in the accounts only when it arises from the purchase of another entity at a price higher than the fair market value of the purchased entity's identifiable assets.
2. Land is valued at cost.
3. All payments out of petty cash are debited to Miscellaneous Expense.
4. Plant assets are classified separately as land or buildings, with an accumulated depreciation account for buildings.
5. Periodic payments of $1,500 per month forservices of H. Hay, who is the sole proprietor of the company, are reported as withdrawals.
6. Small tools used by a large manufacturing firm are^ recorded as expenses when purchased.
7. Investments in equity securities are initially recorded at cost.
8. A retail store estimates inventory rather than taking a complete physical count for purposes of preparing monthly financial statements.
9. A note describing the company's possible liability in a lawsuit is included with the financial statements even though no formal liability exists at the balance sheet date.
10. Depreciation on plant assets is consistently computed each year by the straight-line method.
a) Understandability
b) Verifiability
c) Timeliness
d) Representational faithfulness
e) Neutrality
f) Relevance
g) Going concern
h) Economic entity
i) Historical cost
j) Measurability
k) Materiality
l) Comparability
Explanation / Answer
First Set:
1. h. Timeliness
2. i. Lower of cost or market rule
3. b. Representational faithfulness
4. a. Cost effectiveness
5. c. Recognition
6. h. Timeliness
7. c. Recognition
8. i. Materiality
9. d. Verifiability
10. n. Arms-length transactions
Second Set:
1. Goodwill is recorded in the accounts only when it arises from the purchase of another entity at a price higher than the fair market value of the purchased entity's identifiable assets.
F. This would fall under the category of relevance because it can help the users of financial information predict the present and future events of a company. For example if goodwill is recorded erroneously it could deter users of the information from investing in that company.
2. Land is valued at cost.
E. This is an example of neutrality because the decision is not biased or influential in a specific direction. The information is necessary and doesn%u2019t need to be omitted but places no bearing on the decisions the users of the information may make.
3. All payments out of petty cash are debited to Miscellaneous Expense.
L. This falls under the comparability category because the transactions are debited consistently from the same account and the type of purchased made from this account are similar.
4. Plant assets are classified separately as land or buildings, with an accumulated depreciation account for buildings.
A. This is an example of understandability because it differentiates between the assets and classifies them separately so the information is easier to read and understand by the users.
5. Periodic payments of $1,500 per month for services of H. Hay, who is the sole proprietor of the company, are reported as withdrawals.
B. This would also be an example of verifiability because the proprietor is making withdrawals for his personal use so it wouldn%u2019t be appropriate to list it as anything else. It should be listed under the drawing account in the ledger.
6. Small tools used by a large manufacturing firm are recorded as expenses when purchased.
C. This is an example of timeliness because the revenue is recognized at the time of sale and they meet the definition of the recognition criteria which are the following: meet the definition of an element, be measurable, be relevant, and be reliable. This makes the information available in a timely manner for the users of the information.
7. Investments in equity securities are initially recorded at cost.
I. This is an example of historical cost because the investments are recorded at cost to use for tracking the amount of money a company spends on the investment up to the point that another transaction occurs such as the sale of the equity securities.
8. A retail store estimates inventory rather than taking a complete physical count for purposes of preparing monthly financial statements.
K. This is an example of materiality because the retail store is estimating inventory instead of making a physical count because there could be a manager or higher up in the retail store that has been influenced in a negative capacity and if they do a physical inventory count, there could be a difference in the amount of inventory count causing more questions to arise.
9. A note describing the company's possible liability in a lawsuit is included with the financial statements even though no formal liability exists at the balance sheet date.
D. This would fall under the category of representational faithfulness because although the possible liability in the lawsuit exists after the balance sheet date, the event could potentially affect the company although the information is useless at the present time.
10. Depreciation on plant assets is consistently computed each year by the straight-line method.
B. This is an example of verifiability because the same method of computing the depreciation is used to compute the depreciation on the plants assets each year.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.