Chapter 4 solution on discussion questions

Chapter 4 solution on discussion questions - BUSI1002...

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BUSI1002 Introduction to Accounting Class Discussion Chapter 4 Suggested Solutions for Discussion Questions Brief Ex 4.10 a. Materiality refers to the relative importance of an item. An item is material if knowledge of it might reasonably influence the decisions of users of financial statements. If an item is immaterial, by definition it is not relevant to decision makers. Accountants must account for material items in the manner required by generally accepted accounting principles. However, immaterial items may be accounted for in the most convenient and economical manner. b. Whether a specific dollar amount is “material” depends upon the (1) size of the amount and (2) nature of the item. In evaluating the size of a dollar amount, accountants consider the amount in relation to the size of the organization. Based solely upon dollar amount, $2,500 is not material in relation to the financial statements of a large, publicly owned corporation. For a small business however, this amount could be material. In addition to considering the size of a dollar amount, accountants must also consider the nature of the item. The nature of an item may make the item “material” to users of the financial statements regardless of its dollar amount. Examples might include bribes paid to government officials, or theft of company assets or other illegal acts committed by management. In summary, one cannot say whether $2,500 is a material amount. The answer depends upon the related circumstances. c. Two ways in which the concept of materiality may save time and effort for accountants
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This note was uploaded on 02/22/2010 for the course FBE BUSI1002 taught by Professor Maochunlin during the Winter '08 term at HKU.

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Chapter 4 solution on discussion questions - BUSI1002...

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