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Exam 2: Accounting Judgements

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Question 31

True/False

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The use of historical cost, rather than liquidation value, is supported by the continuity assumption.

A) True
B) False

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verified

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Question 32

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The use of fair value rather than historical cost increases both the relevance and verifiability of the financial statements.

A) True
B) False

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Question 33

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A firm signs a major contract in December to construct custom machinery for a client. No work is begun the current year, yet the notes to the firm's financial statements discuss the nature and dollar amount of the contract. This is an example of

C Corporation exchanged 20,000 shares of its nonconvertible preferred shares for land owned by B Corporation. A competing buyer previously had offered $150,000 cash for the land. Because of tax consequences, the cash offer was not accepted and the lot was exchanged for the shares. C Corporation previously had sold only 100 shares of its preferred shares at $9 per share several months ago. Based on the cost principle, at what amount should the land be reported on C's financial statements?

One of the objectives of financial reporting is to help users assess the amounts, timing and uncertainty of prospective cash flows of the enterprise.

A corporation needed a new warehouse; a contractor quoted a $250,000 price to construct it. The corporation believed that it could build the warehouse for $215,000 and decided to use company employees to construct the warehouse. The final construction cost incurred by the corporation was $240,000 but the asset was recorded at $250,000. This is in violation of the:

The full disclosure principle asserts that the financial reports of a business enterprise should disclose all reliable information relating to its economic affairs.

Revenue is recognized when service is rendered and collection is probable.

When an $30 asset with a six-year estimated useful life is recorded as an expense at the date of purchase, this is an application of the:

Warranty expense on goods sold should be recognized in the period of the sale, even though the costs to fulfill warranty claims will not be incurred until two or three years later.

Under the productive capacity capital maintenance approach, a profit is assumed to have been earned only if enough financial capital has been recovered by the end of the year to enable the business to operate at the same level as at the beginning of the year.

The continuity assumption holds that the entity will continue in business for the foreseeable future but it does not mean that it will be a going concern forever.

The time period concept dictates that the reporting period or fiscal period of an entity must be for 12 months.

Fill in the blanks below with the accounting principle, assumption, or related item that BEST completes each sentence. 1. Recognition of revenue at the end of production is an allowable exception to the ______________________ principle. 2. Parenthetical balance sheet disclosure of the inventory method utilised by a particular company is an application of the _______________________ principle. 3. Corporations must prepare accounting reports at least yearly due to the _______________________ assumption. 4. Some costs, which give rise to future benefits cannot be directly associated with the revenues they generate. Such costs are allocated in a ____________________ and ______________________ manner to the periods expected to benefit from the cost. 5. _______________________ would allow the expensing of all repair tools when purchased, even though they have an estimated life of 3 years. 6. The ________________________ characteristic requires that the same accounting method be used from one accounting period to the next, unless it becomes evident that an alternative method will bring about a better description of a firm's financial situation. 7. _________________________ and _______________________ are the two primary qualities that make accounting information useful for decision making. 8. Information which helps users confirm or correct prior expectations has ________________________. 9. __________________________ enables users to identify the real similarities and differences in economic phenomena because the information has been measured and reported in a similar manner for different enterprises

A corporation made the following entries: $\begin{array} { | l | l | l | } \hline \text { A. Prepaid insurance } & 900 & \\\hline \text { Cash } & & 900 \\\hline \text { B Deprec iation expense } & 10,000 & \\\hline \text { Accumulated depreciation } & & 10,000 \\\hline \text { Chages payable } & 3,000 & \\\hline \text { Cash } & & 3,000 \\\hline \text { D mientory of Merchandise } & 4,000 & \\\hline \text { Accounts payable } & & 4,000 \\\hline\end{array}$ Which entry must have been made as a direct result of the matching principle?

The recognition of periodic amortization expense on company-owned automobiles requires estimating both salvage or residual value, and the useful life of the vehicles. The use of estimates in this case is an example of:

Verifiability focuses on the correct application of a basis of measurement rather than its appropriateness.

Explain how revenues and gains are similar and how they differ.

Under IFRS and ASPE, both assets and liabilities are mostly arises from past events.

An accounting error may be all of the following except: