PROBLEM #2: worth ten (10) points

1. If a company changes accounting principles from period to period without demonstrating that the newly adopted method is preferable to the old and without disclosing the nature and effect of the change, which of the qualitative characteristics is not being followed?

2. Pretend you own a company and you need to determine the replacement cost of your inventory to value it appropriately on your financial statements. You hire four independent appraisers, who value the inventory at four different amounts. You choose to use the lowest amount. Which qualitative characteristic would your decision be lacking? (hint: dont use relevance or faithful representation)

3. In order to provide useful information, firms sometimes must make trade-offs between the qualitative characteristics. For example, when a firm is an early adopter of a new accounting method, their financial statements may be more relevant to decision makers, but the adoption would impair consistency and make trend comparisons over time difficult.

When firms produce their annual financial statements, they must physically count their inventory to verify the amount in that account. When they produce quarterly financial statements, they are allowed to estimate their inventory (and not physically count it). This represents a trade-off between which two qualitative characteristics?

4. Which accounting assumption, principle, or constraint is most applicable when rent paid in advance is recorded as prepaid rent?

5. Which assumption, principle, quality, or modifying convention is violated when a companys CFO purchases a new laptop for personal use, with company money, and charges the account miscellaneous expense?