Page 225 - Accounting Principles (A Business Perspective)

5. Accounting theory

Revenues, costs, and profits applicable to construction and conversion contracts are included in the
consolidated statements of operations using the... percentage-of- completion accounting method.... The
completed contract method was used for income tax reporting in the years this method was allowed.

Why might the management of a company want to use two different methods for accounting and tax purposes?
➢ Real world question A recent annual report of Chevron Corporation stated:
Environmental expenditures that relate to current or future revenues are expensed or capitalized as
appropriate. Expenditures that relate to an existing condition caused by past operations, and do not
contribute to current or future revenue generation, are expensed.
Which principle of accounting is being followed by this policy?

➢ What is the purpose of including a "Summary of significant accounting policies" in the company's
annual report?
Exercises
Exercise A Match the items in Column A with the proper descriptions in Column B.

Column A Column B

Going concern (continuity). a. An assumption relied on in the preparation of the
primary financial statements that would be
unreasonable when the inflation rate is high.

Consistency. b. Concerned with relative dollar amounts.

Disclosure. c. The usual basis for the recording of assets.

Periodicity. d. Required if the accounting treatment differs from
that previously used for a particular item.

Conservatism. e. An assumption that would be unreasonable to use

in reporting on a firm that had become insolvent.

Stable dollar. f. None of these.

Matching. g. Requires a company to use the same accounting
procedures and practices through time.

Materiality. h. An assumption that the life of an entity can be
subdivided into time periods for reporting purposes.

Exchange-price (cost). i. Discourages undue optimism in measuring and
reporting net assets and net income.

Business entity. j. Requires separation of personal from business
activities in the recording and reporting processes.

Exercise B Parker Clothing Company sells its products on an installment sales basis. Data for 2010 and 2011
follow:

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