Two fundamental qualities of useful accounting information

Exercise 2-4

Identify the appropriate qualitative characteristic(s) to be used for given the information provided below.

a. Qualitative characteristic being employed when companies in the same industry are using the same accounting principles

b. Quality of information that confirms users’ earlier expectations

c. Imperative for providing comparisons of a company from period to period

d. Ignores the economic consequences of a standard or rule

e. Requires a high degree of consensus among individuals on a given measurement

f. Predictive value is an ingredient of this fundamental quality of information

g. Four qualitative characteristics that are related to both relevance and faithful representation

h. An item is not recorded because its effect on income would not change a decision

i. Neutrality is an ingredient of this fundamental quality of accounting information

j. Two fundamental qualities that make accounting information useful for decision-making purposes

k. Issuance of interim reports is an example of what enhancing quality of relevance

Exercise 2-6

Identify the accounting assumption, principle, or constraint that describes each situation. Do not use an answer more than once.

a. Allocates expenses to revenues in the proper period

b. Indicates that fair value changes subsequent to purchase are not recorded in the accounts

c. Ensures that all relevant financial information is reported

d. Rationale why plant assets are not reported at liquidation value

e. Indicates that personal and business record keeping should be separately maintained

f. Separates financial information into time periods for reporting purposes

g. Assumes that the dollar is the “measuring stick” used to report on financial performance.

Exercise 2-7

Presented below are a number of operational guidelines and practices that have developed over time.

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices.

a. Fair value changes are not recognized in the accounting records.

b. Financial information is presented so that investors will not be misled

c. Intangible assets are capitalized and amortized over periods benefited

d. Repair tools are expensed when purchased

e. Agricultural companies use fair value for purposes of valuing crops

f. Each enterprise is kept as a unit distinct from its owner or owners

g. All significant post-balance-sheet events are reported

h. Revenue is recorded at point of sale

i. All important aspects of bond indentures are presented in financial statements

j. Rationale for accrual accounting

k. The use of consolidated statements is justified

l. Reporting must be done at defined time intervals

m. An allowance for doubtful accounts is established

n. Goodwill is recorded only at time of purchase

o. A company charges its sales commission costs to expense

Exercise 3-1

Beverly Crusher is a licensed CPA. During the first month of operations of her business (a sole proprietorship), the following events and transactions occurred

Apr 2 Invested $32,000 cash and equipment valued at $14,000 in the business

2 Hired a secretary-receptionist at a salary of $290 per week payable monthly

3 Purchased supplies on account $700. (Debit an asset account.)

7 Paid office rent of $600 for the month

11 Completed a tax assignment and billed client $1,100 for services rendered. (Use Service Revenue account

12 Received $3,200 advance on a management consulting engagement

17 Received cash of $2,300 for services completed for Ferengi Co

21 Paid insurance expense $110.

30 Paid secretary-receptionist $1,160 for the month

30 A count of supplies indicated that $120 of supplies had been used

30 Purchased a new computer for $6,100 with personal funds. (The computer will be used exclusively for business purposes

Journalize the transactions in the general journal. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Exercise 3-8

Andy Roddick is the new owner of Ace Computer Services. At the end of August 2014, his first month of ownership, Roddick is trying to prepare monthly financial statements. Below is some information related to unrecorded expenses that the business incurred during August.

a. At August 31, Roddick owed his employees $1,900 in salaries and wages that will be paid on September 1

b. At the end of the month, he had not yet received the month’s utility bill. Based on past experience, he estimated the bill would be approximately $600

c. On August 1, Roddick borrowed $30,000 from a local bank on a 15-year mortgage. The annual interest rate is 8%.