ch12 - CHAPTER 12 Accounting Principles ANSWERS TO...

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CHAPTER 12 Accounting Principles ANSWERS TO QUESTIONS 1. (a) Generally accepted accounting principles (GAAP) are a set of standards and rules, having substantial authoritative support, that are recognized as a general guide for financial reporting purposes. (b) The bodies that provide authoritative support for GAAP are the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). 2. The FASB’s conceptual framework consists of the following: (1) Objectives of financial reporting. (2) Qualitative characteristics of accounting information. (3) Elements of financial statements. (4) Operating guidelines (assumptions, principles, and constraints). 3. (a) According to the FASB in its development of the conceptual framework, the objectives of financial reporting are to provide information that: (1) is useful to those making investment and credit decisions, (2) is helpful in assessing future cash flows, and (3) identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in those re- sources and claims. (b) The qualitative characteristics are: (1) relevance, (2) reliability, (3) comparability, and (4) con- sistency. 4. Sosa is correct. Consistency means using the same accounting principles and accounting methods from period to period within a company. Without consistency in the application of accounting prin- ciples, it is difficult to determine whether a company is better off, worse off, or the same from period to period. 5. Comparability results when different companies use the same accounting principles. Consistency means using the same accounting principles and methods from year to year within the same company. 6. The going concern assumption is necessary because otherwise depreciation and amortization pol- icies would not be justifiable and appropriate. Also, the current-noncurrent classification of assets and liabilities would lose much of its significance. Labeling anything as fixed or long-term would be difficult to justify. In addition, the going concern assumption lends credibility to the cost principle. 7. Revenue should be recognized in the accounting period in which it is earned. The sales basis involves an exchange transaction between the seller and buyer and the sales price provides an objective measure of the amount of revenue realized.
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8. Cost Incurred (Current Pe- riod) ÷ Total Estimated Cost = Percent Complete $34,000,000 ÷ $170,000,00 0 = 20% Percent Com- plete X Total Reve- nue = Revenue Recog- nized 20% X $210,000,00 0 = $42,000,000 Revenue Recog- nized Actual Cost In- curred = Gross Profit Recog- nized $42,000,000 $34,000,000 = $8,000,000 9. Gross Profit Percentage = ($100,000 – $80,000) ÷ $100,000 = 20%. Cash collected
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This note was uploaded on 03/13/2012 for the course ACCOUNTING 100 taught by Professor Boyle during the Fall '11 term at Seton Hill.

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ch12 - CHAPTER 12 Accounting Principles ANSWERS TO...

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