1 Financial Reporting EOC 1-41 Exercise 1-5 Trade-Off between Qualitative Characteristics n each of the following independent situations, an example is given requiring a t qualitative characteristics discussed in the text. For each situation, identify the relevant briefly discuss how satisfying one characteristic may involve not satisfying another s given requiring a trade-off between the characteristles and 1. The book value of an office building is approaching its originally estimated salvage value of $100.000 would lke to However, its fair value has been estimated at $10 milion. The company's management disclose to financial statement users the current value of the building on the balance sheet. 2. CB Industries has used the FIFO inventory method for the past competitors FIFO to LIFO 20 years. However, all orher major use the LIFO method of accounting for inventories. XCB is contemplating a switch from 8. Hobson, Inc. is negotiating with a major bank for a significant loan, The bank has asked that a set of financial statements be many of the company's suppliers are mailed several weeks after inventory is received, Hobson, inc. is considering estimating the amounts associated with those liabilities to be able to prepare its inan- provided as quickly after the yearend as possible. Because invoices from cial statements more quickly 4. Starship, Inc produces and sells satelites to govemment and private industries, The company pro- vides a warranty guaranteeing the performance of the satelises. A recent space launch placed one of its satellites in orbit, and several malfunctions have occured. At year end, Starship, Inc's auditors would ike the company to disclose the potential liability in the notes to the finanicial statements Officers of Starship, Inc. believe that the satellite can be repsired in orbit and that disclosure of a con tingency such as this would unnecessarly bias the financial statemenss Elements of Financial Reporting For each of the following items, identify the financial statement element being dscussed 1. Changes in equity during a period except those resulting from investments by owners and distribu- Exercise 1-6 tions to owners 2. The net assets of an entity 3. The result of a transaction requiring the future transfer of assets to other entities 4. An increase in assets from the delivery of goods that constitutes the entity's ongoing central operarions 5. An increase in an entity's net assets from incidental transactions 6. An increase in net assets through the issuance of stock 7. Decreases in net assets from peripheral transactions of an enterprise 8. The payment of a dividend 9. Outflows of assets from the delivery of goods or services 10. Items offering future value to an entity Assumptions of Financial Reporting In each of the following independent situations, an example is given involving one of the five traditional assumptions of the accounting model For each situation, identiry the assumption invwolved Ibriefly explain your answer) 1. A subsidiary of Parent, Inc was exhibiting poor earnings performance for the year, In an effort to Exercise 1-7 increase the subsidiary's reported eamings, Parent, inc purchased products from the subsidiary at twice the normal mark the financial statements for MacNell &Sons, the accountant included certain 2. When preparing 3. The operations of Untah Savings &Loan are being evaluated by the federal government. During their personal assets of MachNeil and his sons investigations, govemment officials have determined thar numerous loans made by top management were unwise and have seriously endangered the future existence of the savings and loan 4 Pine Valley Ski Resort has experienced a drastic reduction in revenues because of light snowfall for the year. Rather than produce financial statements at the end of the fiscal year, as is traditionally done, management has elected to wait until next year and present results for a two-year period 1 Financial Reporting EOC 1-41 Exercise 1-5 Trade-Off between Qualitative Characteristics n each of the following independent situations, an example is given requiring a t qualitative characteristics discussed in the text. For each situation, identify the relevant briefly discuss how satisfying one characteristic may involve not satisfying another s given requiring a trade-off between the characteristles and 1. The book value of an office building is approaching its originally estimated salvage value of $100.000 would lke to However, its fair value has been estimated at $10 milion. The company's management disclose to financial statement users the current value of the building on the balance sheet. 2. CB Industries has used the FIFO inventory method for the past competitors FIFO to LIFO 20 years. However, all orher major use the LIFO method of accounting for inventories. XCB is contemplating a switch from 8. Hobson, Inc. is negotiating with a major bank for a significant loan, The bank has asked that a set of financial statements be many of the company's suppliers are mailed several weeks after inventory is received, Hobson, inc. is considering estimating the amounts associated with those liabilities to be able to prepare its inan- provided as quickly after the yearend as possible. Because invoices from cial statements more quickly 4. Starship, Inc produces and sells satelites to govemment and private industries, The company pro- vides a warranty guaranteeing the performance of the satelises. A recent space launch placed one of its satellites in orbit, and several malfunctions have occured. At year end, Starship, Inc's auditors would ike the company to disclose the potential liability in the notes to the finanicial statements Officers of Starship, Inc. believe that the satellite can be repsired in orbit and that disclosure of a con tingency such as this would unnecessarly bias the financial statemenss Elements of Financial Reporting For each of the following items, identify the financial statement element being dscussed 1. Changes in equity during a period except those resulting from investments by owners and distribu- Exercise 1-6 tions to owners 2. The net assets of an entity 3. The result of a transaction requiring the future transfer of assets to other entities 4. An increase in assets from the delivery of goods that constitutes the entity's ongoing central operarions 5. An increase in an entity's net assets from incidental transactions 6. An increase in net assets through the issuance of stock 7. Decreases in net assets from peripheral transactions of an enterprise 8. The payment of a dividend 9. Outflows of assets from the delivery of goods or services 10. Items offering future value to an entity Assumptions of Financial Reporting In each of the following independent situations, an example is given involving one of the five traditional assumptions of the accounting model For each situation, identiry the assumption invwolved Ibriefly explain your answer) 1. A subsidiary of Parent, Inc was exhibiting poor earnings performance for the year, In an effort to Exercise 1-7 increase the subsidiary's reported eamings, Parent, inc purchased products from the subsidiary at twice the normal mark the financial statements for MacNell &Sons, the accountant included certain 2. When preparing 3. The operations of Untah Savings &Loan are being evaluated by the federal government. During their personal assets of MachNeil and his sons investigations, govemment officials have determined thar numerous loans made by top management were unwise and have seriously endangered the future existence of the savings and loan 4 Pine Valley Ski Resort has experienced a drastic reduction in revenues because of light snowfall for the year. Rather than produce financial statements at the end of the fiscal year, as is traditionally done, management has elected to wait until next year and present results for a two-year period