Exam 14: Accounting Principles and Reporting Standards

The matching principle is being applied when the cost of equipment is depreciated over its useful life.

The income statement shown below was prepared and sent by Jenna Preston, the owner of Preston Gifts, to several of her creditors. The business is a sole proprietorship that sells miscellaneous gifts. An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles. Using the following additional information provided by the owner, prepare an income statement in accordance with generally accepted accounting principles. Additional information provided by owner: 1. All sales were for cash. 2. The beginning and ending merchandise inventories were valued at their estimated selling price. The actual cost of the ending inventory is estimated to be $12,000. The actual cost of the beginning inventory is estimated to be $20,000. 3. On December 31, 2019, suppliers of merchandise are owed $11,000. On January 1, 2019, they were owed $14,000. 4. The owner paid herself a salary of $1,250 per month and charged this amount to the Salary of Owner account. 5. A check for $800 to cover the December rent on the owner's personal apartment was issued from the firm's bank account. This amount was charged to Rent Expense.

The concept of realization permits a company to recognize income whenever there is an increase in the market value of the assets it holds.

Which of the following is allowed under generally accepted accounting principles?

The income statement shown below was prepared and sent by Curtis Brown, the owner of Curt's Crafts, to several of his creditors. The business is a sole proprietorship that sells crafts and toys. An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles. Using the following additional information provided by the owner, prepare an income statement in accordance with generally accepted accounting principles. Income Statement CURT'S CRAFTS Year Ended December 31, 2019 Additional information provided by owner: 1.On December 31, 2019, accounts receivable from customers total $32,000. On January 1, 2019, accounts receivable totaled $52,000. 2.The beginning and ending merchandise inventories were valued at their estimated selling price. The actual cost of the ending inventory is estimated to be $6,000. The actual cost of the beginning inventory is estimated to be $18,000. 3.On December 31, 2019 suppliers of merchandise are owed $16,000. On January 1, 2019, they were owed $11,000. 4.The owner paid himself a salary of $1,600 per month and charged this amount to the Salaries Expense account. 5.A check for $300 to cover the December electric bill on the owner's personal home was issued from the firm's bank account. This amount was charged to Utilities Expense.

Why is the cost principle dependent on the going concern assumption?

Explain the following statement. "Investors and creditors expect to receive a cash flow directly or indirectly from the business entity."

Which of the following statements is not correct?

Most businesses follow the general rule that revenue is recognized when earned, not necessarily when the cash is received.

The monetary unit assumption assumes that:

Select the statement below that correctly describes the qualitative characteristic of comparability.

The materiality constraint refers to:

If too much of the cost of an asset is charged as depreciation expense in the present period, the firm's net income will be understated in later periods.