Chapter 2: Q2Q (page 61)
What is the primary objective of financial reporting?
The primary objective of financial reporting is to provide useful information, track cash flows and deal with liabilities.
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The chairman of the company’s board of directors for which you are the chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of directors than “out-of-date costs.” Present some arguments to convince him that accounting data should still be based on historical cost.
Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.
a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.
Retained Earnings 60,000
Accumulated Depreciation—Buildings 60,000
b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.
Inventory 21,000
Gain on Inventories 21,000
c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.
Equipment 135,000
Common Stock 135,000
d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.
e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.
Accounts Receivable 61,500
Sales Revenue 61,500
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 non-current classifications in its balance sheet.
d)The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.
What are the four basic assumptions that underlie the financial accounting structure?
What are the five steps used to determine the proper time to recognize revenue?
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