Recognition/De-recognition Measurement Presentation and Disclosure

Economic Entity Periodicity Full Disclosure

Control Monetary Unit

Revenue Recognition and Going Concern

Realization

Matching Historical Cost

Fair Value

For each situation that follows, identify the foundational principle that is most applicable:

1.Price-level changes, meaning inflation and deflation, are not recognized in the accounting records.

2.Sufficient financial information is presented so that reasonably prudent investors will not be misled.

3.Goodwill is recorded only at the time of a business combination and does not change unless the goodwill becomes impaired.

4.There is no intent to liquidate the company's operations or activities.

5.Market value is used by companies for the valuation of certain securities that are regularly bought and sold.

6.After initial acquisition, the entity values land at its original transaction price.

7.All significant post-balance sheet events are reported.

8.Revenue is recorded at the point of sale.

9.Sales commission costs are charged to expense in the period of the sale.

10.Reporting must be done at defined time intervals.

Question 1.5

Red Squirrel Ltd. provides audited financial statements to its creditors and is required to maintain certain covenants based on its debt to equity ratio and return on assets. In addition, management at Red Squirrel Ltd. receive a bonus partially based on revenues for the year. Additional information related to Red Squirrel Ltd. is shown below:

1.Depreciation expense on the building for the year was $45,000. Since the building was increasing in value during the year, the controller decided not to record any depreciation expense in the current year.

2.An order for $61,500 was received from a customer on December 29, 2020 for products on hand. This order was shipped f.o.b. shipping point on January 3rd, 2021. The company made the following entry in December (prior to yearend of 2020):

Accounts Receivable61,500

Sales Revenue61,500

Please comment on the appropriateness of Red Squirrel's accounting procedures and their impact on the company's financial statement users for both scenarios, applying the conceptual framework.