Question 1.1 (Total: 15 marks; 3 objectives x 5 marks each)

In chapter 1, we learned about various objectives of financial reporting. Please identify three of these objectives:

Question 1.2 (Total: 16 marks; 8 marks for a definition and 8 marks for an example)

Chapter 1 of your textbook also described a concept called asymmetry. Please explain what is meant by information asymmetry and provide an example.

Question 1.3 (Total: 36 marks; 3 marks each)

Chapter 2 introduces you to the foundational principles and qualitative characteristics of accounting, which are as follows:

a) Economic entity assumption

b) Going concern assumption

c) Monetary unit assumption

d) Periodicity assumption

e) Historical cost principle

f) Revenue recognition principle

g) Matching principle

h) Full disclosure principle

i) Relevance

j) Reliability

k) Comparability

l) Representational faithfulness

For each situation that follows, identify the foundational principle of accounting or qualitative characteristics that are most applicable. Hint: Each item may be used more than once or not at all.

1. The earning process is completed and realized or realizable: __________

2. Quarterly financial reports: __________

3. The use of accruals and deferrals in adjusting the accounts: __________

4. Useful standard measuring unit for business transactions: __________

5. Including explanatory notes as part of the financial statements: __________

6. The affairs of the business are distinguished from those of its owners: __________

7. A business enterprise is assumed to have a long life: __________

8. Valuing assets at amounts originally paid for them: __________

9. Application of the same accounting principles as in the preceding year: __________

10. Presentation of timely information with predictive and feedback value: __________

11. Using the Canadian dollar in the financial statements: __________

12. Accounting information reflects the economic substance of the event or transaction: __________.

Question 1.4 (Total: 33 marks)

The following are transactions recorded by Lock and Key Corporation during the current year.

1. Ordinary operating maintenance on equipment was recorded as follows:

Equipment: 2,500

Accounts Payable: 2,500

2. Lock and Key Corporation received an advance on a custom order for merchandise that will be shipped during the next accounting year.

Cash: 8,000

Sales Revenue: 8,000

3. Lock and Key Corporation is holding inventory on consignment for Rubber Ltd. Lock and Key will only pay Rubber when a sale is made to a customer. Lock and Key made the following entry when it received the inventory:

Inventory: 15,000

Accounts Payable: 15,000

4. On the last day of the accounting period, a 12-month insurance policy was purchased. The insurance coverage is for the next accounting year.

Insurance Expense: 4,000

Cash: 4,000

Required: For each transaction

1) Determine which component of the conceptual framework (qualitative characteristic and/or principle) was violated, if any, and

2) Give the entry that should have been recorded if there was a violation