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Chapter 1 Environment and Theoretical Structure of
Financial Accounting

BRIEF Exercises

Brief Exercise 1–1
Revenues ($340,000 + 60,000)$400,000
Rent ($40,000 ( 2)(20,000)
Utilities ($50,000 + 2,000) (52,000)
Net income$208,000


Exercise 1–6

2.Distribution to owners
4.Assets, liabilities and equity
5.Comprehensive income
10.Net income
11.Investment by owner

Exercise 1–7

List AList B

o 1.Predictive valuea.Decreases in equity resulting from transfers to owners.
h 2.Relevanceb.Requires consideration of the costs and value of information.
g 3.Timelinessc.Important for making interfirm comparisons.
a 4.Distribution to ownersd.Applying the same accounting practices over time.
j 5.Confirmatory valuee.Users understand the information in the context of the
decision being made.
e 6.Understandabilityf.Agreement between a measure and the phenomenon it purports to represent.
n 7.Gaing.Information is available prior to the decision.
f 8.Faithful representationh.Pertinent to the decision at hand.
k 9.Comprehensive incomei.Implies consensus among different measurers.
p 10.Materialityj.Information confirms expectations.
c 11.Comparabilityk.The change in equity from nonowner transactions.
m 12.Neutralityl.The process of admitting information into financial statements.
l 13.Recognitionm.The absence of bias.
d 14.Consistencyn.Results if an asset is sold for more than its book value.
b 15.Cost effectivenesso.Information is useful in predicting the future.
i 16.Verifiabilityp.Concerns the relative size of an item and its effect on decisions.

Exercise 1–8

5.Predictive value and/or confirmatory value
6.Faithful representation
8.Cost effectiveness

Exercise 1–9

List AList B

d 1.Matching principlea.The enterprise is separate from its owners and other entities.
g 2.Periodicityb.A common denominator is the dollar.
e 3.Historical cost principlec.The entity will continue indefinitely.
i 4.Materialityd.Record expenses in the period the related revenue is recognized.
h 5.Realization principlee.The original transaction value upon acquisition.
c 6.Going concern assumptionf.All information that could affect decisions should be reported.
b 7.Monetary unit assumptiong.The life of an enterprise can be divided into artificial time periods.
a 8.Economic entity assumptionh.Criteria usually satisfied at point of sale.
f 9.Full-disclosure principlei.Concerns the relative size of an item and its effect on decisions.

Exercise 1–10

1.The economic entity assumption
2.The periodicity assumption
3.The matching principle (also the going concern assumption) 4.The historical cost (original transaction value) principle 5.The realization (revenue recognition) principle
6.The going concern assumption

Exercise 1–11

1.The historical cost (original transaction value) principle 2.The periodicity assumption
3.The realization (revenue recognition) principle
4.The economic entity assumption
5.The matching principle; materiality
6. The full disclosure principle

Exercise 1–12

1.Disagree Monetary unit assumption
2.DisagreeFull disclosure principle
3.AgreeThe matching principle
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