E2-11HO (Assumptions, Principles, and Constraints) A number of operationa guidelines used by accountants are described below. 1. The treasurer of Doug Flutie Co. wishes to prepare finaneisu periodically treasurer of Doug Flutie Co. wishes to prepare financial stateodietal only during downturns in their wine production, which occur when the rhubarb crop fails. He states that it is at such times that the statements could be most easily prepared. In no event would more than 30 months pass without statements being prepared. 2. The Chicago Power & Light Company has purchased a large amount of decided that because the general price level has changed materially over the years, they will issue only price-level adjusted financial statements. property, plant, and equipment over a number of years. They have rt Smith Manufacturing Co. decided to manufacture its own widgets those of their competitors, R rom an outside supplier. (Do not use the revenue recognition principle.) Flana Robe because it would be cheaper to do so than to buy them from an outside supplier. In an attempt to make their statements more comparable with obert Smith charged its inventory account for what they felt the widgets would have cost if they had been purchased gan's Discount Centers buys its merchandise by the truck and train- Flanagan does not defer any transportation costs in computing carload. the cost of its ending inventory. Such costs, although varying from period to period, are always material in amount. 5. Gab& Run, Inc., a fast food company, sells franchises for $100,000, accepting a $5,000 down payment and a 50-year note for the remainder. Grab & Run promises for 3 years to assist in site selection, building, and management training. Grab & Run records the S$100,000 franchise fee as revenue in the period in which the contract is signed. 6. Curtis Conway Company "faces possible expropriation (i.e., takeover) of foreign facilities and possible losses on sums owed by various customers on the verge of bankruptcy." The company president has decided that these possibilities should not be noted on the financial statements because Conway still hopes that these events will not take place. 7. Mike Singletary, manager of College Bookstore, Inc, bought a computer for his own use. He paid for the computer by writing a check on the bookstore checking account and charged the"Office Equipment" account. 8. Curtis Enis,Inc. recently completed a new 60-story office building that houses their home offices and many other tenants. All the office equipment for the building that had a per item or per unit cost of $1,000 or less was expensed as immaterial, even though the office equipment has an average life of 10 years. The total cost of such office equipment was approximately $26 million. (Do not use the matching principle.) 9. The AICPA, in an accounting guide for brokers and other dealers in securities, stated that "the trading and investment accounts...should be valued at market or fair value for financial reporting purposes..." The brokerage firm of James and Williams, Inc. continues to value its trading and investment accounts at cost or market, which is lower. A large lawsuit has been filed against Big Cat Corp. by Perry Co. Big Cat has recorded a loss and related estimated liability equal to the maximum possible amount it feels it might lose. Big Cat is confident, however, that either it will win the suit or it will owe a much smaller amount. 10. Instructions For each of the foregoing, list the assumption, principle, or constraint that has been violated or applied. List only one term for each use
