Chap2soln[1] - E XERCISE 2-1(2030 minutes(a(b(c(d(e Feedback Value Cost/Benefit and Materiality Neutrality Consistency Neutrality(f(g(h(i(j

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EXERCISE 2-1 (20–30 minutes) (a) Feedback Value. (f) Relevance and Reliability. (b) Cost/Benefit and Materiality. (g) Timeliness. (c) Neutrality. (h) Relevance. (d) Consistency. (i) Comparability. (e) Neutrality. (j) Verifiability. BRIEF EXERCISE 2-2 1. Verifiability 2. Comparability 3. Consistency 4. Timeliness BRIEF EXERCISE 2-3 (a) Equity (b) Revenues (c) Equity (d) Assets (e) Expenses (f) Losses (g) Liabilities (h) Distributions to owners (i) Gains (j) Investments by owners BRIEF EXERCISE 2-4 (a) Periodicity (b) Monetary unit (c) Going concern (d) Economic entity BRIEF EXERCISE 2-5 (a) Revenue recognition (b) Matching (c) Full disclosure (d) Historical cost BRIEF EXERCISE 2-6 (a) Industry practices (b) Conservatism
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(c) Cost-benefit relationship (d) Materiality BRIEF EXERCISE 2-7 Companies and their auditors for the most part have adopted the general rule of thumb that anything under 5% of net income is considered not material. Recently, the SEC has indicated that it is okay to use this percentage for the initial assessment of materiality, but other factors must be considered. For example, companies can no longer fail to record items in order to meet consensus analyst’s earnings numbers; preserve a positive earnings trend; convert a loss to a profit or vice versa; increase management compensation, or hide an illegal transaction like a bribe. In other words, both quantitative and qualitative factors must be considered in determining when an item is material. (a)
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This note was uploaded on 08/31/2010 for the course AEM 3360 at Cornell University (Engineering School).

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Chap2soln[1] - E XERCISE 2-1(2030 minutes(a(b(c(d(e Feedback Value Cost/Benefit and Materiality Neutrality Consistency Neutrality(f(g(h(i(j

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