Page 231 - Accounting Principles (A Business Perspective)

5. Accounting theory

b. The information must be timely.
c. The information must be neutral.
d. The information must be verifiable.

To be reliable, information must (identify the incorrect quality):
a. Be verifiable.
b. Be timely.
c. Have representational faithfulness.
d. Be neutral.
The basic elements of financial statements consist of:
a. Terms and their definitions.

b. The objectives of financial reporting.
c. The qualitative characteristics.
d. The new income statement format.
Beyond the numbers—Critical thinking
Business decision case A Jim Casey recently received his accounting degree from State University and went
to work for a Big-Four CPA firm. After he had been with the firm for about six months, he was sent to the Ling

Clothing Company to work on the audit. He was not very confident of his knowledge at this early point in his career.
He noticed, however, that some of the company's transactions and events were recorded in a way that might be in
violation of accounting theory and generally accepted accounting principles.
Study each of the following facts to see if the auditors should challenge the financial accounting practices used or
the intentions of management. Write your decisions and the reasoning behind your conclusions.
This problem can serve as an opportunity to apply accounting theory to situations with which you are not yet
familiar and as a preview of future chapters. Some of the following situations relate to material you have already

covered, and some situations relate to material to be covered in future chapters. After each item, we have given an
indication of the chapter in which that item is discussed. You may research future chapters to find the correct
answer. Alternatively, you could use your present knowledge of accounting theory to determine whether or not
Casey should challenge each of the financial accounting practices used. Realize, however, that some generally
accepted accounting practices were based on compromise and seem to differ with accounting theory as described in
this chapter.
One of the senior members of management stated the company planned to replace all of the furniture next year.
He said that the cash in the Accumulated Depreciation account would be used to pay for the furniture. (Ch. 3)
The company held the books open at the end of 2010 so they could record some early 2011 sales as 2010

revenue. The justification for this practice was that 2010 was not a good year for profits. (Ch. 3, 5, 6)
The company's buildings were appraised for insurance purposes. The appraised values were USD 10,000,000
higher than the book value. The accountant debited Buildings and credited Paid-in Capital from Appreciation for
the difference. (Ch. 5)
The company recorded purchases of merchandise at the list price rather than the gross selling (invoice) price.
(Ch. 6)
Goods shipped to the company from a supplier, FOB destination, were debited to Purchases. The goods were not

included in ending inventory because the goods had not yet arrived. (Ch. 5, 6)

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