E2.4 (LO2) (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows. Relevance Faithful representation Predictive value Confirmatory value Neutrality Completeness Timeliness Materiality Verifiability Understandability Comparability Free from error Instructions Identify the appropriate qualitative characteristic(s) to be used given the information provided below. a. Qualitative characteristic being displayed when companies in the same industry are using the same accounting principles. b. Quality of information that confirms users' earlier expectations. c. Imperative for providing comparisons of a company from period to period d. Ignores the economic consequences of a standard or rule. e. Requires a high degree of consensus among individuals on a given measurement. f. Predictive value is an ingredient of this fundamental quality of information. 8. Four qualitative characteristics that enhance both relevance and faithful representation. h. An item is not reported because its effect on income would not change a decision. 1. Neutrality is a key ingredient of this fundamental quality of accounting information. j. Two fundamental qualities that make accounting information useful for decision making purposes k. Issuance of interim reports is an example of what enhancing ingredient? E2.5 (LO2) (Elements of Financial Statements) Five interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below. Assets Liabilities Equity Income Expenses Instructions Identify the element or elements associated with the following nine items. a. Obligation to transfer resources arising from a past transaction b. Increases ownership interest by issuance of shares. c. Declares and pays cash dividends to owners. d. Increases in net assets in a period from non-owner sources. e. Items characterized by service potential or future economic benefit. f. Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners. 8. Residual interest in the assets of the enterprise after deducting its liabilities. h. Increases assets during a period through sale of product. 1. Decreases assets during the period by purchasing the company's own shares. E2.6 (L03,4) (Assumptions, Principles, and constraint) Presented below are the assumptions, principles, and constraint used in this chapter. 1. Economic entity assumption 2. Going concern assumption 3. Monetary unit assumption 4. Periodicity assumption S.Accrual-basis assumption 6. Historical cost principle 7. Fair value principle 8. Expense recognition principle 9. Full disclosure principle 10. Revenue recognition principle 11. Cost constraint Instructions Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once. a. Allocates expenses to revenues in the proper period. b. Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) c. Ensures that all relevant financial information is reported. d. Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.) e. Generally records revenue at the point of sale. f. Indicates that personal and business record keeping should be separately maintained. 8. Separates financial information into time periods for reporting purposes. h. Permits the use of fair value valuation in certain situations. 1. Assumes that the yen is the measuring stick" used to report on financial performance of a Japanese company. E2.7 (L03,4) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time. Instructions Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) a. Fair value changes are not recognized in the accounting records. b. Accounts receivable are recorded for sales on account rather than waiting until cash is received c. Financial information is presented so that investors will not be misled. d. Intangible assets are capitalized and amortized over periods benefited. e. Brokerage companies use fair value for purposes of valuing financial securities. f. Each enterprise is kept as a unit distinct from its owner or owners. 8. All significant post-statement of financial position events are reported. h. Revenue is recorded at point of sale. 1. All important aspects of bond indentures are presented in financial statements. j. Rationale for accrual accounting. k. The use of consolidated statements is justified. 1. Reporting must be done at defined time intervals. m. An allowance for doubtful accounts is established. n. All payments out of petty cash are charged to Miscellaneous Expense. 0. Goodwill is recorded only at time of purchase. p. Cash received and paid is not the basis used to recognize revenues and expenses. 9. A company charges its sales commission costs to expense. E2.4 (LO2) (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows. Relevance Faithful representation Predictive value Confirmatory value Neutrality Completeness Timeliness Materiality Verifiability Understandability Comparability Free from error Instructions Identify the appropriate qualitative characteristic(s) to be used given the information provided below. a. Qualitative characteristic being displayed when companies in the same industry are using the same accounting principles. b. Quality of information that confirms users' earlier expectations. c. Imperative for providing comparisons of a company from period to period d. Ignores the economic consequences of a standard or rule. e. Requires a high degree of consensus among individuals on a given measurement. f. Predictive value is an ingredient of this fundamental quality of information. 8. Four qualitative characteristics that enhance both relevance and faithful representation. h. An item is not reported because its effect on income would not change a decision. 1. Neutrality is a key ingredient of this fundamental quality of accounting information. j. Two fundamental qualities that make accounting information useful for decision making purposes k. Issuance of interim reports is an example of what enhancing ingredient? E2.5 (LO2) (Elements of Financial Statements) Five interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below. Assets Liabilities Equity Income Expenses Instructions Identify the element or elements associated with the following nine items. a. Obligation to transfer resources arising from a past transaction b. Increases ownership interest by issuance of shares. c. Declares and pays cash dividends to owners. d. Increases in net assets in a period from non-owner sources. e. Items characterized by service potential or future economic benefit. f. Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners. 8. Residual interest in the assets of the enterprise after deducting its liabilities. h. Increases assets during a period through sale of product. 1. Decreases assets during the period by purchasing the company's own shares. E2.6 (L03,4) (Assumptions, Principles, and constraint) Presented below are the assumptions, principles, and constraint used in this chapter. 1. Economic entity assumption 2. Going concern assumption 3. Monetary unit assumption 4. Periodicity assumption S.Accrual-basis assumption 6. Historical cost principle 7. Fair value principle 8. Expense recognition principle 9. Full disclosure principle 10. Revenue recognition principle 11. Cost constraint Instructions Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once. a. Allocates expenses to revenues in the proper period. b. Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) c. Ensures that all relevant financial information is reported. d. Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.) e. Generally records revenue at the point of sale. f. Indicates that personal and business record keeping should be separately maintained. 8. Separates financial information into time periods for reporting purposes. h. Permits the use of fair value valuation in certain situations. 1. Assumes that the yen is the measuring stick" used to report on financial performance of a Japanese company. E2.7 (L03,4) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time. Instructions Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) a. Fair value changes are not recognized in the accounting records. b. Accounts receivable are recorded for sales on account rather than waiting until cash is received c. Financial information is presented so that investors will not be misled. d. Intangible assets are capitalized and amortized over periods benefited. e. Brokerage companies use fair value for purposes of valuing financial securities. f. Each enterprise is kept as a unit distinct from its owner or owners. 8. All significant post-statement of financial position events are reported. h. Revenue is recorded at point of sale. 1. All important aspects of bond indentures are presented in financial statements. j. Rationale for accrual accounting. k. The use of consolidated statements is justified. 1. Reporting must be done at defined time intervals. m. An allowance for doubtful accounts is established. n. All payments out of petty cash are charged to Miscellaneous Expense. 0. Goodwill is recorded only at time of purchase. p. Cash received and paid is not the basis used to recognize revenues and expenses. 9. A company charges its sales commission costs to expense