CHAPTER 2



CHAPTER 2

CONCEPTUAL FRAMEWORK UNDERLYING ACCOUNTING

Part 1: Read Chapter 2 and answer the following questions. Also, work Brief Exercises 2, 3, 4, 5, 6, 7, 9, 10 and 11.

Part 2: Work Exercises 1 – 6 on pages 57-59.

1. Describe the conceptual framework underlying accounting.

2. Why is a conceptual framework needed?

3. The first level of the conceptual framework is the basic objectives of financial reporting as described in SFAC No. 1. What are these objectives?

4. The second level of the conceptual framework includes the fundamental concepts that include the qualitative characteristics of accounting information and the elements of financial statements.

a. What assumption is made about the users of financial statements?

b. The quality of information that permits reasonably informed users to perceive the significance of the information is called ___________________________________________.

c. The purpose of financial reporting is to provide information that is useful in making decisions. What are the two primary qualities that make accounting information useful? Describe each.

d. What are the three ingredients of relevant information? Describe each.

e. What are the three ingredients of reliable information? Describe each.

f. What are the two secondary qualities that make accounting information useful? Describe each.

5. SFAC No. 6 lists 10 elements of financial statements (we only record items that fit one of these descriptions). You should be able to list and define the 10 elements of financial statements.

6. The third level of the conceptual framework includes the recognition and measurement concepts. These concepts tell us which, when and how to record, measure and report economic events. (You do not need to be concerned with the differences between assumptions, principles and constraints.) You should be able to list the 12 assumptions, principles, and constraints discussed in the chapter and give a brief description of each. For test purposes, you should know how to apply the various concepts.

Chapter 2

Practice Exercises

Identify which basic assumption, principle, or constraint applies to each situation below.

1. Dell Corporation amortizes the cost of a trademark over the trademark’s useful life.

2. Dow provides quarterly financial statements to its shareholders.

3. Compaq records revenue when the computers are delivered to customers, even though the cash has not been received.

4. Ron Carter, the owner of a car dealership, does not list the electric bill for his home on the income statement of the dealership.

5. Marathon Oil records depreciation based on the cost of its equipment rather than on the current fair market value of the equipment.

6. The Kroger Company includes information about a lawsuit in progress in the notes to the financial statements.

7. JC Penney recognizes estimated bad debt expense in the same period the credit sales are recorded.

8. Eckerd’s records the cost of long-lived assets that cost less than $500 as an expense in the period purchased.

9. Walgreens reports inventory with an original cost of $3 per unit at the current cost of $2 per unit. The company has 1,000,000 units on hand.

10. Blockbuster Video records the CEO’s salary as an expense in the period in which earned by the CEO.

Which basic assumption, principle or constraint is violated in each situation below? Assume all amounts are material.

1. Dewey, Cheatam & Howe lists land on its balance sheet at the estimated market value even though the company has no intention of selling the land.

2. B. Cook owns 100 shares of Fly-by-Night Airlines. He has not received financial statements from the company for 3 years.

3. The Phantom Corporation does not include the assets and liabilities of subsidiary companies in its financial statements.

4. Crooked Inc. paid $15,000 for a 2-year insurance policy and reported the entire amount as an expense in the year paid.

5. The Outlaw Brothers recorded revenue for a $20,000 advance payment received from a customer. The goods will be shipped next year.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download