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Unformatted text preview: E2-5 Correct. (Assumptions, Principles, and Constraints) Presented below are a number of operational guidelines and practices that have developed over time. Instructions Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (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 reasonably prudent investors will not be misled. (d) Intangibles 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.) (p) Goodwill is recorded only at time of purchase. Historical cost principle Conservatism Full disclosure principle Matching principle Materiality Industry practices Economic entity assumption Full disclosure principle Revenue recognition principle Full disclosure principle Matching principle Economic entity assumption Periodicity assumption Matching principle Materiality Historical cost principle (q) No profits are anticipated and all possible losses are recognized. (r) A company charges its sales commission costs to expense. Conservatism Matching principle ...
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- Spring '10