Q #1. Listed below are the basic assumptions, broad accounting principles, and constraints discussed in this chapter.

Economic entity assumption

Going concern assumption

Periodicity assumption

Monetary unit assumption

Historical cost principle

Realization principle

Matching principle

Full-disclosure principle

Cost effectiveness

Materiality

Conservatism

Identify by letter the assumption, principle, or constraint that relates to each statement or phrase below.

_____ 1. Revenue is recognized only after certain criteria are satisfied.

_____ 2. Information that could affect decision making should be reported.

_____ 3. Cause-and-effect relationship between revenues and expenses.

_____ 4. The basis for measurement of many assets and liabilities.

_____ 5. Relates to the qualitative characteristic of timeliness.

_____ 6. All economic events can be identified with a particular entity.

_____ 7. The benefits of providing accounting information should exceed the cost of doing so.

_____ 8. Page 42A consequence is that GAAP need not be followed in all situations.

_____ 9. Not a qualitative characteristic, but a practical justification for some accounting choices.

_____ 10. Assumes the entity will continue indefinitely.

_____ 11. Inflation causes a violation of this assumption.

Q # 2. Financial statement elements.

For each of the items listed below, identify the appropriate financial statement element or elements.

1. Obligation to transfer cash or other resources as a result of a past transaction.

2. Dividends paid by a corporation to its shareholders.

3. Inflow of an asset from providing a good or service.

4. The financial position of a company.

5. Increase in equity during a period from nonowner transactions.

6. Increase in equity from peripheral or incidental transaction.

7. Sale of an asset used in the operations of a business for less than the asset's book value.

8. The owners' residual interest in the assets of a company.

9. An item owned by the company representing probable future benefits.

10. Revenues plus gains less expenses and losses.

11. An owner's contribution of cash to a corporation in exchange for ownership shares of stock.

12. Outflow of an asset related to the production of revenue.

Q # 3. Multiple choice; concept statements, basic assumptions, principles

Determine the response that best completes the following statements or questions.

1.The primary objective of financial reporting is to provide information

a. About a firm's management team.

b. Useful to capital providers.

c. Concerning the changes in financial position resulting from the income-producing efforts of the entity.

d. About a firm's financing and investing activities.

2. Statements of Financial Accounting Concepts issued by the FASB

a. Represent GAAP.

b. Have been superseded by SFAS

c. Are subject to approval of the SEC.

d. Identify the conceptual framework within which accounting standards are developed.

3. In general, revenue is recognized as earned when the earning process is virtually complete and

a. The sales price has been collected.

b. A purchase order has been received.

c. There is reasonable certainty as to the collectability of the asset to be received.

d. A contract has been signed.

4. In depreciating the cost of an asset, accountants are most concerned with

a. Conservatism.

b. The realization principle.

c. Full disclosure.

d. The matching principle.

5. The primary objective of the matching principle is to

a. Provide full disclosure.

b. Record expenses in the period that related revenues are recognized.

c. Provide timely information to decision makers.

d. Promote comparability between financial statements of different periods.

6. The separate entity assumption states that, in the absence of contrary evidence, all entities will survive indefinitely.

a. True

b. False

Part 2.

Q #1.

Cash flows during the first year of operations for the HK Consulting Company were as follows:

Cash collected from customers, $340,000; Cash paid for rent, $40,000;

Cash paid to employees for services rendered during the year, $120,000;

Cash paid for utilities, $50,000.

In addition, you determine that customers owed the company $60,000 at the end of the year and no bad debts were anticipated. Also, the company owed the gas and electric company $2,000 at year-end, and the rent payment was for a two-year period.

Required: Calculate accrual net income for the year.

Q #2.

For each of the following items, identify the appropriate financial statement element or elements:

1.Probable future sacrifices of economic benefits;

2.Probable future economic benefits owned by the company;

3.Inflows of assets from ongoing, major activities;

4.Decrease in equity from peripheral or incidental transactions.

Q #3.

For each of the following situations,

(1) Indicate whether you agree or disagree with the financial reporting practice employed and

(2) State the basic assumption, pervasive constraint, or accounting principle that is applied (if you agree), or violated (if you disagree).

1.WBC Corporation did not disclose that it was the defendant in a material lawsuit because the trial was still in progress.

2.Alliant Semiconductor Corporation files quarterly and annual financial statements with the SEC.

3.Reliant Pharmaceutical paid rent on its office building for the next two years and charged the entire expenditure to rent expense.

4.Rockville Engineering records revenue only after products have been shipped, even though customers pay Rockville 50% of the sales price in advance.