In each case below, accounting conventions may have been violated.

1. Hastings Manufacturing Company uses the cost method for computing the balance sheet amount of inventory unless the market value of the inventory is less than the cost, in which case the market value is used. At the end of the current year, the market value is $154,000 and the cost is $160,000.

Hastings uses the $154,000 figure to compute current assets because management believes it is the more cautious approach.

2. Gormanus Company has annual sales of $20,000,000. It follows the practice of recording any items costing less than $500 as expenses in the year purchased. During the current year, it purchased several chairs for the executive conference room at $490 each, including freight. Although the chairs were expected to last for at least ten years, they were recorded as an expense in accordance with company policy.
3. Nogel Company closed its books on October 31, 20x6, before preparing its annual report. On November 3, 20x6, a fire destroyed one of the company’s two factories. Although the company had fire insurance and would not suffer a loss on the building, a significant decrease in sales in 20x7 was expected because of the fire. The fire damage was not reported in the 20x6 financial statements because the fire had not affected the company’s operations during that year.
4. Ex-Act Drug Company spends a substantial portion of its profits on research and development. The company had been reporting its $5,000,000 expenditure for research and development as a lump sum, but management recently decided to begin classifying the expenditures by project, even though its recordkeeping costs will increase.
5. During the current year, RBI Company changed from one generally accepted method of accounting for inventories to another method.
Required User Insight: For each of these cases, identify the accounting convention that applies, state whether or not the treatment is in accord with the convention and GAAP, and briefly explain why.
Forms of the Income Statement