Violations of Assumptions and PrinciplesThe following are accounting procedures and practices used by severalcompanies. A. As soon as it purchases inventory, Sokolich Company records thepurchase price as cost of goods sold to simplify its accountingprocedures.B. At the end of each year, Sloan Company records and reports the value of its land based on appraisal values.C. Ebert Company prepares financial statements only every twoyears to reduce its costs of preparing the statements.D. Guthrie Company receives orders from customers and recordsrevenue at that time, even though it has not yet delivered products or services to the customers.E. Because of inflation, Cross Company adjusts its financialstatements each year to show the current purchasing power for allitems. F. David Thomas combines his personal transactions and businesstransactions when he prepares his company's financial statementsso that he can tell how well he is doing on an "overall" basis.G. At the end of each year, Vann Company reports its economicresources on a liquidation basis even though it is likely tooperate in the future. Required:Identify what accounting assumption or principle each procedure orpractice violates, and indicate what should be done to rectify theviolation.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Violations of Assumptions and Principles
The following are accounting procedures and practices used by several
companies.
A. As soon as it purchases inventory, Sokolich Company records the
purchase price as cost of goods sold to simplify its accounting
procedures.
B. At the end of each year, Sloan Company records and reports the
value of its land based on appraisal values.
C. Ebert Company prepares financial statements only every two
years to reduce its costs of preparing the statements.
D. Guthrie Company receives orders from customers and records
revenue at that time, even though it has not yet delivered
products or services to the customers.
E. Because of inflation, Cross Company adjusts its financial
statements each year to show the current
items.
F. David Thomas combines his personal transactions and business
transactions when he prepares his company's financial statements
so that he can tell how well he is doing on an "overall" basis.
G. At the end of each year, Vann Company reports its economic
resources on a liquidation basis even though it is likely to
operate in the future.
Required:
Identify what accounting assumption or principle each procedure or
practice violates, and indicate what should be done to rectify the
violation.
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