Exercises

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EXERCISES
2.1
Instructions
Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)
(a) Market value changes are not recognized in the accounting records. (b) Lower of cost or market is used to value inventories.
(c) Financial information is presented so that investors will not be misled. (d) Intangible assets are capitalized and amortized over periods benefited. (e) Repair tools are expensed when purchased.

(f) Agricultural companies use market value for purposes of valuing crops. (g) Each enterprise is kept as a unit distinct from its owner or owners. (h) All significant postbalance sheet events are reported.

(i) Revenue is recorded at point of sale.
(j) All important aspects of bond indentures are presented in financial statements. (k) Rationale for accrual accounting.
(l) The use of consolidated statements is justified.
(m) Reporting must be done at defined time intervals.
(n) An allowance for doubtful accounts is established.
(o) All payments out of petty cash are charged to Miscellaneous Expense. (Do not use conservatism.)

2-2 Presented below are a number of facts related to R. Kelly, Inc. Assume that no mention of these facts was made in the financial statements and the related notes. Instructions
Assume that you are the auditor of R. Kelly, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items. (a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted. (b) Equipment purchases of $170,000 were partly financed during the year through the issuance of a $110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at $60,000.

(c) R. Kelly has reported its ending inventory at $2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes. (d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.

CONCEPTS FOR ANALYSIS
2-3 (Conceptual Framework—General) Roger Morgan has some questions regarding the theoretical framework in which standards are set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Roger’s supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Roger did notice that accounting standards seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework.Roger feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice. Instructions

(a) Help Roger recognize the purpose of and benefit of a conceptual framework. (b) Identify any Statements of Financial Accounting Concepts issued by FASB that may be helpful to Roger in developing his theoretical background.

2-4 (Conceptual Framework—General) The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued seven Statements of Financial Accounting Concepts. These statements are intended to set forth objectives and fundamentals that will be the basis for developing financial accounting and reporting standards. The objectives identify the goals and purposes of financial reporting....
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