1460T c02.gxd 11:11:2005 09:45 Page 48 Nishant-16 NIshant-16:Desktop polder:prakash 11/11: EQA 48 Chapter 2 Conceptual Framework Underlying Financial Accounting QUESTIONS 1.What is a conceptual framework?Why is a conceptual 14.When is revenue generally recognized?Why has that framework necessary in financial accounting? date been chosen as the point at which to recognize the 2.What are the primary objectives of financial reporting revenue resulting from the entire producing and selling as indicated in Statement of Financial Accounting Concepts process? No.1? 15.Magnus Eatery operates a catering service specializing 3.What is meant by the term "qualitative characteristics of in business luncheons for large corporations.Magnus accounting information"? requires customers to place their orders 2 weeks in 4.Briefly describe the two primary qualities of useful ac- advance of the scheduled events.Magnus bills its counting information. customers on the tenth day of the month following the 5.According to the FASB conceptual framework,the date of service and requires that payment be made within 30 days of the billing date.Conceptually,when objectives of financial reporting for business enterprises should Magnus recognize revenue related to its cater- are based on the needs of the users of financial state- ing service? ments.Explain the level of sophistication that the Board assumes about the users of financial statements. 16.What is the difference between realized and realizable? Give an example of where the concept of realizable is 6.What is the distinction between comparability and used to recognize revenue. consistency？ 17.What is the justification for the following deviations from 7.Why is it necessary to develop a definitional framework recognizing revenue at the time of sale? for the basic elements of accounting? (a)Installment sales method of recognizing revenue. 8.Expenses,losses,and distributions to owners are all de- creases in net assets.What are the distinctions among (b)Recognition of revenue at completion of production them? for certain agricultural products. 9.Revenues,gains,and investments by owners are all in- (c)The percentage-of-completion basis in long-term creases in net assets.What are the distinctions among construction contracts. them? 18.Jane Hull Company paid $135,000 for a machine in 2007. 10.What are the four basic assumptions that underlie the fi- The Accumulated Depreciation account has a balance of nancial accounting structure? $46,500 at the present time.The company could sell the machine today for $150,000.The company president be- 11.The life of a business is divided into specific time periods, lieves that the company has a "right to this gain."What usually a year,to measure results of operations for each does the president mean by this statement?Do you such time period and to portray financial conditions at agree? the end of each period. 19.Three expense recognition methods (associating cause (a)This practice is based on the accounting assumption and effect,systematic and rational allocation,and im- that the life of the business consists of a series of mediate recognition)were discussed in the text under time periods and that it is possible to measure the matching principle.Indicate the basic nature of each accurately the results of operations for each period. of these types of expenses and give two examples of each. Comment on the validity and necessity of this assumption. 20.Statement of Financial Accounting Concepts No.5identifies four characteristics that an item must have before it is (b)What has been the effect of this practice on account- recognized in the financial statements.What are these ing?What is its relation to the accrual system?What four characteristics? influence has it had on accounting entries and methodology? 21.Briefly describe the types of information concerning financial position,income,and cash flows that might be 12.What is the basic accounting problem created by the provided:(a)within the main body of the financial state- monetary unit assumption when there is significant in- ments,(b)in the notes to the financial statements,or flation?What appears to be the FASB position on a sta- (c)as supplementary information. ble monetary unit? 22.In January 2008,Alan Jackson Inc.doubled the amount 13.The chairman of the board of directors of the company of its outstanding stock by selling on the market an ad- for which you are chief accountant has told you that he ditional 10,000 shares to finance an expansion of the busi- has little use for accounting figures based on cost.He be- ness.You propose that this information be shown by a lieves that replacement values are of far more signifi- footnote on the balance sheet as of December 31,2007. cance to the board of directors than "out-of-date costs." The president objects,claiming that this sale took place Present some arguments to convince him that account- after December 31,2007,and,therefore,should not be ing data should still be based on cost. shown.Explain your position.48 • Chapter 2 Conceptual Framework Underlying Financial Accounting 1. What is a conceptual framework? Why is a conceptual framework necessary in financial accounting? 2. What are the primary objectives of financial reporting as indicated in Statement of Financial Accounting Concepts No. 1? 3. What is meant by the term “qualitative characteristics of accounting information”? 4. Briefly describe the two primary qualities of useful ac￾counting information. 5. According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on the needs of the users of financial state￾ments. Explain the level of sophistication that the Board assumes about the users of financial statements. 6. What is the distinction between comparability and consistency? 7. Why is it necessary to develop a definitional framework for the basic elements of accounting? 8. Expenses, losses, and distributions to owners are all de￾creases in net assets. What are the distinctions among them? 9. Revenues, gains, and investments by owners are all in￾creases in net assets. What are the distinctions among them? 10. What are the four basic assumptions that underlie the fi￾nancial accounting structure? 11. The life of a business is divided into specific time periods, usually a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period. (a) This practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption. (b) What has been the effect of this practice on account￾ing? What is its relation to the accrual system? What influence has it had on accounting entries and methodology? 12. What is the basic accounting problem created by the monetary unit assumption when there is significant in￾flation? What appears to be the FASB position on a sta￾ble monetary unit? 13. The chairman of the board of directors of the company for which you are chief accountant has told you that he has little use for accounting figures based on cost. He be￾lieves that replacement values are of far more signifi￾cance to the board of directors than “out-of-date costs.” Present some arguments to convince him that account￾ing data should still be based on cost. 14. When is revenue generally recognized? Why has that date been chosen as the point at which to recognize the revenue resulting from the entire producing and selling process? 15. Magnus Eatery operates a catering service specializing in business luncheons for large corporations. Magnus requires customers to place their orders 2 weeks in advance of the scheduled events. Magnus bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Magnus recognize revenue related to its cater￾ing service? 16. What is the difference between realized and realizable? Give an example of where the concept of realizable is used to recognize revenue. 17. What is the justification for the following deviations from recognizing revenue at the time of sale? (a) Installment sales method of recognizing revenue. (b) Recognition of revenue at completion of production for certain agricultural products. (c) The percentage-of-completion basis in long-term construction contracts. 18. Jane Hull Company paid $135,000 for a machine in 2007. The Accumulated Depreciation account has a balance of $46,500 at the present time. The company could sell the machine today for $150,000. The company president be￾lieves that the company has a “right to this gain.” What does the president mean by this statement? Do you agree? 19. Three expense recognition methods (associating cause and effect, systematic and rational allocation, and im￾mediate recognition) were discussed in the text under the matching principle. Indicate the basic nature of each of these types of expenses and give two examples of each. 20. Statement of Financial Accounting Concepts No. 5 identifies four characteristics that an item must have before it is recognized in the financial statements. What are these four characteristics? 21. Briefly describe the types of information concerning financial position, income, and cash flows that might be provided: (a) within the main body of the financial state￾ments, (b) in the notes to the financial statements, or (c) as supplementary information. 22. In January 2008, Alan Jackson Inc. doubled the amount of its outstanding stock by selling on the market an ad￾ditional 10,000 shares to finance an expansion of the busi￾ness. You propose that this information be shown by a footnote on the balance sheet as of December 31, 2007. The president objects, claiming that this sale took place after December 31, 2007, and, therefore, should not be shown. Explain your position. QUESTIONS 1460T_c02.qxd 11:11:2005 09:45 Page 48 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: