Chapter 1. Environment and Theoretical Structure of Financial Accounting Flashcards
Identify the basic assumption, broad accounting principle, or pervasive constraint that applies to this statement. Sirius Satellite Radio Inc. files its annual and quarterly financial statements with the SEC.
The periodicity assumption
Identify the basic assumption, broad accounting principle, or pervasive constraint that applies to this statement. The president of Applebee’s International, Inc., travels on the corporate jet for business purposes only and does not use the jet for personal use.
The economic entity assumption
Identify the basic assumption, broad accounting principle, or pervasive constraint that applies to this statement. Jackson Manufacturing does not recognize revenue for unshipped merchandise even though the merchandise has been manufactured according to customer specifications.
The realization (revenue recognition) principle
Identify the basic assumption, broad accounting principle, or pervasive constraint that applies to this statement. Lady Jane Cosmetics depreciates the cost of equipment over their useful lives.
The matching principle
Identify the basic assumption or broad accounting principle that was violated in each of the following situations. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured.
The matching principle
Identify the basic assumption or broad accounting principle that was violated in each of the following situations. McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million.
The historical cost (original transaction value) principle
Identify the basic assumption or broad accounting principle that was violated in each of the following situations. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.
The economic entity assumption
Predictive value (FASB’s conceptual framework)
Information is useful in predicting the future.
Relevance (FASB’s conceptual framework)
Pertinent to the decision at hand.
Timeliness (FASB’s conceptual framework)
Information is available prior to the decision.
Distribution to owners (FASB’s conceptual framework)
Decreases in equity resulting from transfers to owners.
Confirmatory value (FASB’s conceptual framework)
Information confirms expectations.
Understandability (FASB’s conceptual framework)
Users understand the information in the context of the decision being made.
Gain (FASB’s conceptual framework)
Results if an asset is sold for more than its book value.
Faithful representation (FASB’s conceptual framework)
Agreement between a measure and the phenomenon it purports to represent.
