1460T_c02.qxd12/31/0509:10 am Page52 EQA 52 Chapter 2 Conceptual Framework Underlying Financial Accounting Instructions Identify the element or elements from page 51 associated with the 12 items below. (a)Arises from peripheral or incidental transactions. (b)Obligation to transfer resources arising from a past transaction. (c)Increases ownership interest. (d)Declares and pays cash dividends to owners. (e) Increases in net assets in a period from nonowner sources. (f)Items characterized by service potential or future economic benefit. (g) Equals increase in assets less liabilities during the year,after adding distributions to owners and subtracting investments by owners. (h) Arises from income statement activities that constitute the entity's ongoing major or central operations. () Residual interest in the assets of the enterprise after deducting its liabilities. Increases assets during a period through sale of product. (k) Decreases assets during the period by purchasing the company's own stock. S Includes all changes in equity during the period,except those resulting from investments by own- ers and distributions to owners. (L06, E2-4 (Assumptions,Principles,and Constraints) Presented below are the assumptions,principles,and 7,8) constraints used in this chapter. 1. Economic entity assumption 5.Historical cost principle 9.Materiality Going concern assumption 6 Matching principle 10.Industry practices 3. Monetary unit assumption 7.Full disclosure principle 11.Conservatism 4.Periodicity assumption 8.Cost-benefit relationship Instructions Identify by number the accounting assumption,principle,or constraint that describes each situation be- low.Do not use a letter more than once. (a)Allocates expenses to revenues in the proper period. (b)Indicates that market value changes subsequent to purchase are not recorded in the accounts.(Do ⊕ not use revenue recognition principle.) (c) Ensures that all relevant financial information is reported (d)Rationale why plant assets are not reported at liquidation value.(Do not use historical cost principle.) (e) Anticipates all losses,but reports no gains. (f) Indicates that personal and business record keeping should be separately maintained (g) Separates financial information into time periods for reporting purposes. (h)Permits the use of market value valuation in certain specific situations. (1 Requires that information significant enough to affect the decision of reasonably informed users should be disclosed.(Do not use full disclosure principle.) ) Assumes that the dollar is the "measuring stick"used to report on financial performance. (L06, E2-5 (Assumptions,Principles,and Constraints)Presented below are a number of operational guide- 7,8) lines and practices that have developed over time. Instructions Select the assumption,principle,or constraint that most appropriately justifies these procedures and prac- tices.(Do not use qualitative characteristics.) (a)Market value changes are not recognized in the accounting records (b)Lower of cost or market is used to value inventories. (c)Financial information is presented so that investors will not be misled. (d)Intangible assets are capitalized and amortized over periods benefited. (e) Repair tools are expensed when purchased. (⑤ Agricultural companies use market value for purposes of valuing crops (g) Each enterprise is kept as a unit distinct from its owner or owners. (h) All significant postbalance sheet events are reported. ) Revenue is recorded at point of sale. (G) All important aspects of bond indentures are presented in financial statements. (k) Rationale for accrual accounting. ) The use of consolidated statements is justified. (m)Reporting must be done at defined time intervals (n)An allowance for doubtful accounts is established. (o)All payments out of petty cash are charged to Miscellaneous Expense.(Do not use conservatism.)Instructions Identify the element or elements from page 51 associated with the 12 items below. (a) Arises from peripheral or incidental transactions. (b) Obligation to transfer resources arising from a past transaction. (c) Increases ownership interest. (d) Declares and pays cash dividends to owners. (e) Increases in net assets in a period from nonowner sources. (f) Items characterized by service potential or future economic benefit. (g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners. (h) Arises from income statement activities that constitute the entity’s ongoing major or central operations. (i) Residual interest in the assets of the enterprise after deducting its liabilities. (j) Increases assets during a period through sale of product. (k) Decreases assets during the period by purchasing the company’s own stock. (l) Includes all changes in equity during the period, except those resulting from investments by own￾ers and distributions to owners. E2-4 (Assumptions, Principles, and Constraints) Presented below are the assumptions, principles, and constraints used in this chapter. 1. Economic entity assumption 5. Historical cost principle 9. Materiality 2. Going concern assumption 6. Matching principle 10. Industry practices 3. Monetary unit assumption 7. Full disclosure principle 11. Conservatism 4. Periodicity assumption 8. Cost-benefit relationship Instructions Identify by number the accounting assumption, principle, or constraint that describes each situation be￾low. Do not use a letter more than once. (a) Allocates expenses to revenues in the proper period. (b) Indicates that market value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) (c) Ensures that all relevant financial information is reported. (d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.) (e) Anticipates all losses, but reports no gains. (f) Indicates that personal and business record keeping should be separately maintained. (g) Separates financial information into time periods for reporting purposes. (h) Permits the use of market value valuation in certain specific situations. (i) Requires that information significant enough to affect the decision of reasonably informed users should be disclosed. (Do not use full disclosure principle.) (j) Assumes that the dollar is the “measuring stick” used to report on financial performance. E2-5 (Assumptions, Principles, and Constraints) Presented below are a number of operational guide￾lines and practices that have developed over time. Instructions Select the assumption, principle, or constraint that most appropriately justifies these procedures and prac￾tices. (Do not use qualitative characteristics.) (a) Market value changes are not recognized in the accounting records. (b) Lower of cost or market is used to value inventories. (c) Financial information is presented so that investors will not be misled. (d) Intangible assets are capitalized and amortized over periods benefited. (e) Repair tools are expensed when purchased. (f) Agricultural companies use market value for purposes of valuing crops. (g) Each enterprise is kept as a unit distinct from its owner or owners. (h) All significant postbalance sheet events are reported. (i) Revenue is recorded at point of sale. (j) All important aspects of bond indentures are presented in financial statements. (k) Rationale for accrual accounting. (l) The use of consolidated statements is justified. (m) Reporting must be done at defined time intervals. (n) An allowance for doubtful accounts is established. (o) All payments out of petty cash are charged to Miscellaneous Expense. (Do not use conservatism.) 52 • Chapter 2 Conceptual Framework Underlying Financial Accounting (L0 6, 7, 8) (L0 6, 7, 8) 1460T_c02.qxd 12/31/05 09:10 am Page 52