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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Violations of Assumptions and Principles

The following are accounting procedures and practices used by several companies.

  1. A. As soon as it purchases inventory, Sokolich Company records the purchase price as cost of goods sold to simplify its accounting procedures.
  2. B. At the end of each year, Sloan Company records and reports the value of its land based on appraisal values.
  3. C. Ebert Company prepares financial statements only every two years to reduce its costs of preparing the statements.
  4. 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.
  5. E. Because of inflation, Cross Company adjusts its financial statements each year to show the current purchasing power for all items.
  6. 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.
  7. 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.

To determine

Identify the type of accounting assumption or principle each procedure or practice violates, and also indicate the manner by which these violations can be rectified.

Explanation

Accounting principle:

These are the guidelines which are to be applied while preparing the accounting books through financial data. It contains the suggestions and rules which have been applied at various points by various entities in order to provide standardized accepted rule-based financial information.

Accounting assumption:

These are the accounting practices or principles which are considered to be applied while preparing the financial statements. The results expected from the financial information prepared can be achieved when the accounting assumptions have been followed by the corporation.

  1. In this situation there is a violation of expense recognition principle, as per the principle the cost incurred is to be recognized as an expense when the assets or liabilities are used for the purpose to generate revenues in the particular period and not when they are purchased.
  2. In this situation there is a violation of historical cost principle, as per the principle the historical cost of the land that was purchased should be retained in the accounting record until they are being sold.
  3. In this situation there is a violation of period-of-time assumption, as per the assumption the financial statements are prepared for a definite and particular period to analyze the financial performance on a timely basis...

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