Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881



Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem

Case 2-63 Analysis of the Accounting Cycle

Susan Eel wants to sell you her wholesale fish store. She shows you a balance sheet with total assets of $50,000 and total liabilities of $20,000. According to the income statement, last year’s net income was $40,000;

When examining the accounting records, you notice that several accounts receivable in the $10,000 to $11000 range are not supported by source documents. You also notice that there is no source documentation to support the $30,000 balance in the building account and the $10,000 balance in the equipment account. Susan tells you that she gave the building and refrigeration equipment to the business in exchange for stock. She also says that she has not had time to set up and monitor any paperwork for accounts receivable or accounts payable.


What requirements for transaction recognition appear to have been ignored when the accounts receivable building, and equipment were recorded?

To determine


A typical financial statement consists of income statement, balance sheet and statement of cash flows. In order to recognize an event in the financial statement, the event must have an influence on the elements of the financial statement like revenue, expense, assets, liabilities and stockholder’s equity.

Requirements for transaction recognition ignored when the accounts receivable, building, and equipment were recorded.


The source documents act as an evidence for the occurrence of a business transaction. It supports the reliability of financial information pre...

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