2 Conceptual Framework for Financial Reporting BRIEF EXERCISES 2
BRIEF EXERCISES
BE2-1 (L03) Match the qualitative characteristics below with the following statements.
1. Relevance 5. Comparability
2. Faithful representation 6. Completeness
3. Predictive value 7. Neutrality
4. Confirmatory value 8. Timeliness
(a) Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena.
(b) Having information available to users before it loses its capacity to influence decisions.
(c) Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future.
(d) Information that is capable of making a difference in the decisions of users in their capacity as capital providers.
(e) Absence of bias intended to attain a predetermined result or to induce a particular behavior.
BE2-2 (L03) Match the qualitative characteristics below with the following statements.
1. Timeliness 5. Faithful representation
2. Completeness 6. Relevance
3. Free from error 7. Neutrality
4. Understandability 8. Confirmatory value
(a) Quality of information that assures users that information represents the economic phenomena that it purports to represent.
(b) Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.
(c) The extent to which information is accurate in representing the economic substance of a transaction.
(d) Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.
(e) Quality of information that allows users to comprehend its meaning.
BE2-3 (L03) Discuss whether the changes described in each of the cases below require recognition in the CPA’s audit report as to consistency. (Assume that the amounts are material.)
(a) The company changed its inventory method to FIFO from weighted-average, which had been used in prior years.
(b) The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years.
(c) The estimated remaining useful life of plant property was reduced because of obsolescence.
BE2-4 (L03) Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and faithful representation.)
(a) The annual reports of Best Buy Co. are audited by certified public accountants.
(b) Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption.
(c) Starbucks Corporation has used straight-line depreciation since it began operations.
(d) Motorola issues its quarterly reports immediately after each quarter ends.
BE2-5 (L03) Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material.
(a) Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net income.
(b) Hindi Co. has an unusual gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments.
It decides to net the gain and loss because the net effect is considered immaterial. Hindi Co.’s income for the current year was $10 million.
(c) Damon Co. expenses all capital equipment under $25,000 on the basis that it is immaterial. The company has followed this practice for a number of years.
BE2-6 (L04) For each item below, indicate to which category of elements of financial statements it belongs.
(a) Retained earnings (e) Depreciation (h) Dividends
(b) Sales (f) Loss on sale of equipment (i) Gain on sale of investment
(c) Additional paid-in capital (g) Interest payable (j) Issuance of common stock
(d) Inventory
BE2-7 (L04) Explain how you would decide whether to record each of the following expenditures as an asset or an expense.
Assume all items are material.
(a) Legal fees paid in connection with the purchase of land are $1,500.
(b) Eduardo, Inc. paves the driveway leading to the office building at a cost of $21,000.
(c) A meat market purchases a meat-grinding machine at a cost of $3,500.
(d) On June 30, Monroe and Meno, medical doctors, pay 6 months’ office rent to cover the month of July and the next 5 months.
(e) Smith’s Hardware Company pays $9,000 in wages to laborers for construction on a building to be used in the business.
(f) Alvarez’s Florists pays wages of $2,100 for the month to an employee who serves as driver of their delivery truck.
BE2-8 (L05) Identify which basic assumption of accounting is best described in each item below.
(a) The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports.
(b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.
(c) Walgreen Co. reports current and noncurrent classifications in its balance sheet.
(d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.
BE2-9 (L05) If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in the financial statements for the following items.
(a) Land. (d) Inventory.
(b) Unamortized bond premium. (e) Prepaid insurance.
(c) Depreciation expense on equipment.
BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.
(a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
(b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
(d) Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.
BE2-11 (L06) Vande Velde Company made three investments during 2017. (1) It purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model. (2) It purchased 2,000 shares of GE stock, which trades on the NYSE. (3) It invested $10,000 in local development authority bonds.
Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds. Where will Vande Velde report these investments in the fair value hierarchy?
BE2-12 (L06) What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below?
(a) Target was involved in litigation over the last year. This litigation is disclosed in the financial statements.
(b) Target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets.
(c) Target records the purchase of a new Dell PC at its cash equivalent price.
