You are getting ready to prepare the next set of annual financial statements for Ashish and Associates.

As the financial accountant, you are required to explain your treatment of transactions and events based on Accounting Concepts and Principles. These include; Accounting entity concept, Accounting period concept, Cost principle, Matching principle, Profit (or revenue) recognition principle, Prudence (or conservatism) principle, and Going concern assumption.

When preparing financial statements for users decision making, such as the Income Statement (Statement of Financial Performance) and the Balance Sheet (Statement of Financial Position), you are guided by the General Principles of Reporting. These are; Relevance and Faithful representation (including completeness, neutral, free from error, prudence (conservatism)).

Relevance is affected by Materiality. While Faithful representation is enhanced by Comparability, Verifiability, Timeliness, and Understandability. However, Cost is a major constraint on providing financial information.

Assessment Tasks:

For each of the following five situations, (i) to (v), complete tasks a) & b) on the next page.

1. Ashish wants to expense (instead of capitalizing) the cost of a number of equipment items that each cost less than $500.

2. Ashish could increase its reported profit by changing the method of valuing (costing) inventory, but he is unsure about making this change.

3. Ashish is considering publishing quarterly financial statements to provide more current information about the business.

4. Ashish is negotiating the sale of $300,000 of inventory. Ashish has some financial problems and is anxious to report this sale in its income statement for the current year ending 30 June. The sale was finished and the goods were invoiced and delivered on 8 July.

5. Ashish was recently sued for $200 000, but the claimant has indicated a willingness to settle for less than that amount. Ashish hopes to settle for $70 000, but his solicitors believe the settlement will cost between $100 000 and $120 000. Ashishs auditor insists that the settlement be shown as a liability on the balance sheet. At issue is whether the liability should be reported at $70 000 or $110 000.

1. Identify the accounting concept or principle that is violated in each of the following situations. Choose from the following; Comparability, Materiality, Prudence, Profit recognition, Entity and Timeliness. ( x 5 = 2 Marks)

2. Explain your choice of accounting concept or principle as identified in Part a).

( x 5 = 2 Marks)