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1、CHAPTER 7Accounting PrinciplesASSIGNMENT CLASSIFICATION TABLEBriefABStudy Objectives1.Explain the meaning ofQuestions1, 2Exercises1, 2ExercisesProblemsProblemsgenerally acceptedaccounting principles andidentify the key items ofthe conceptualframework.2.Describe the basic33objectives of financialrepo
2、rting.3.Discuss the qualitative3, 4, 54, 5, 6characteristics ofaccounting informationand elements of financialstatements.4.Identify the basic671, 2, 31A, 2A, 3A1B, 2B, 3Bassumptions used byaccountants.5.Identify the basic princi-7, 8, 9, 10,71, 2, 3, 41A, 2A, 3A1B, 2B, 3Bples of accounting.126.Ident
3、ify the two con-117, 81, 2, 33A3Bstraints in accounting.7.Understand and analyze13, 14, 15,9, 10, 115, 6, 7, 8,4A, 5A4B, 5Bclassified financialstatements.1698.Explain the accounting17, 1810principles used in inter-national operations.7-1ASSIGNMENT CHARACTERISTICS TABLEProblemDifficultyTimeNumber1ADe
4、scriptionAnalyze transactions to identify accounting principle orLevelModerateAllotted (min.)2030assumption violated, and prepare correct entries.2ADetermine the appropriateness of journal entries inModerate2030terms of generally accepted accounting principles orassumptions.3AIdentify accounting ass
5、umptions, principles, andModerate2030constraints.4APrepare a classified balance sheet and analyze financialModerate3545position.5APrepare a multiple-step income statement and analyzeModerate3545profitability.1BAnalyze transactions to identify accounting principle orModerate2030assumption violated, a
6、nd prepare correct entries.2BDetermine the appropriateness of journal entries inModerate2030terms of generally accepted accounting principles orassumptions.3BIdentify accounting assumptions, principles, andModerate2030constraints.4BPrepare a classified balance sheet and analyzeModerate3545financial
7、position.5BPrepare a multiple-step income statement and analyzeModerate3545profitability.7-2BLOOMS TAXONOMY TABLE7-3Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and ProblemsKnowledgeQ7-1Q7-2BE7-2BE7-1ComprehensionApplicationAnalysisSynthesisEvaluationStudy
8、 Objective1.Explain the meaning of gener-ally accepted accountingprinciples and identify the keyitems of the conceptualframework.Q7-3BE7-3BE7-4BE7-5BE7-6BE7-7Q7-6E7-1E7-3Q7-7Q7-8Q7-9Q7-10Q7-12E7-1E7-3Q7-14Q7-15P7-3AP7-3BBE7-8Q7-16BE7-9BE7-10BE7-11E7-5E7-10E7-6E7-7E7-8E7-9E7-1E7-3P7-3AP7-3BQ7-8E7-4E7
9、-2P7-1AP7-2AP7-1BE7-2Q7-13E7-8P7-4AP7-5AP7-4BP7-5BQ7-13P7-4AP7-5AP7-4BP7-3AP7-3BE7-2P7-1AP7-2AP7-1BP7-2BP7-2BQ7-3Q7-4Q7-52.Describe the basic objectivesof financial reporting.3.Discuss the qualitativecharacteristics of accountinginformation and elements offinancial statements.4.Identify the basic as
10、sumptionsused by accountants.BE7-75.Identify the basic principles ofaccounting.Q7-11BE7-7Q7-18Q7-176.Identify the two constraints inaccounting.7.Understand and analyzeclassified financial statements.P7-5B8.Explain the accountingprinciples used in internationaloperations.Broadening Your PerspectiveCo
11、mmunication Group Decision InterpretingFinancial ReportingFinancialCaseCommunicationStatementsComp. AnalysisResearch CaseA Global Focus Group DecisionInterpreting FinancialCaseStatementsCookie ChronicleExploring the WebEthics CaseGroup Decision CaseComp. AnalysisResearch CaseA Global FocusCookie Chr
12、onicleANSWERS TO QUESTIONS1.(a)(b)Generally accepted accounting principles (GAAP) are a set of standards and rules, havingsubstantial authoritative support, that are recognized as a general guide for financialreporting.The bodies that provide authoritative support for GAAP are the Financial Accounti
13、ng Stan-dards Board (FASB) and the Securities and Exchange Commission (SEC).2.3.4.5.6.7.8.9.The FASBs conceptual framework consists of the following:(1) Objectives of Financial Reporting.(2) Qualitative Characteristics of Accounting Information.(3) Elements of Financial Statements.(4) Operating Guid
14、elines (Assumptions, Principles, and Constraints).(a) According to the FASB in its development of the conceptual framework, the objectives offinancial reporting are to provide information that: (1) is useful to those making investmentand credit decisions, (2) is helpful in assessing future cash flow
15、s, and (3) identifies the eco-nomic resources (assets), the claims to those resources (liabilities), and the changes inthose resources and claims.(b) The qualitative characteristics are: (1) relevance, (2) reliability, (3) comparability, and (4)consistency.Curtis is correct. Consistency means using
16、the same accounting principles and accounting meth-ods from period to period within a company. Without consistency in the application of accountingprinciples, it is difficult to determine whether a company is better off, worse off, or the same fromperiod to period.Comparability results when differen
17、t companies use the same accounting principles. Consistencymeans using the same accounting principles and methods from year to year within the samecompany.The going concern assumption is necessary because otherwise depreciation and amortizationpolicies would not be justifiable and appropriate. Also,
18、 the current-noncurrent classification ofassets and liabilities would lose much of its significance. Labeling anything as fixed or long-termwould be difficult to justify. In addition, the going concern assumption lends credibility to the costprinciple.Revenue should be recognized in the accounting p
19、eriod in which it is earned. The sales basisinvolves an exchange transaction between the seller and buyer and the sales price provides anobjective measure of the amount of revenue realized.Expired costs generate revenues only in the current period and therefore are expensed immedi-ately. Unexpired c
20、osts will generate revenues in current and future periods and are recorded asassets.(a) The accountant discloses information about an entitys financial position, operations, andcash flows in the financial statements, or in the notes that accompany the statements.(b) The trade-offs involved with disc
21、losure balance the costs of preparing additional informationand the benefits from using it.7-4Questions Chapter 7 (Continued)10.11.12.13.14.15.16.17.18.Cost is used because it is both relevant and reliable. Cost is relevant because it represents theprice paid, the assets sacrificed, or the commitmen
22、t made at the date of acquisition. Cost isreliable because it is objectively measurable, factual, and verifiable. It is the result of anexchange transaction. As a result, cost is the basis used in preparing financial statements.The two constraints are materiality and conservatism. The materiality co
23、nstraint means that anitem may be so small that failure to follow generally accepted accounting principles will not influ-ence the decision of a reasonably prudent investor or creditor. The conservatism constraintmeans that when in doubt, the accountant chooses the accounting method that is least li
24、kely tooverstate assets and net income.Recording Osterhaus additional investment of $5,000 as revenues is inappropriate. An invest-ment in a corporation increases the common stock account, not revenues.Three relationships that are helpful in assessing profitability are: (1) the profit margin percent
25、age(or return on sales), (2) return on assets, and (3) return on common stockholders equity. Morethan one profitability relationship is useful in that the relationships help in different types of analy-sis. Return on sales, for example, measures the percentage of each sales dollar that is includedin
26、 net income, whereas return on assets measures the contribution of each dollar of assets ingenerating income. The former, then, helps analyze profits in terms of revenues alone; the latterhelps analyze profits in terms of the asset base in generating sales and profits. If the return onassets is lowe
27、r than warranted, the company may not be using its assets effectively; if return onsales is lower than warranted, the company may not be controlling costs effectively.Natasha Companys working capital (a) is $60,000 $20,000 = $40,000, and its current ratio (b)is $60,000 $20,000 = 3:1.Whenever current
28、 assets are less than current liabilities, working capital is negative and the cur-rent ratio will be less than 1:1. (Whenever current assets are greater than current liabilities,working capital is positive and the current ratio is greater than 1:1.)A debt to total assets ratio of 62% is fairly subs
29、tantial. But more is involved in a credit decisionthan just one financial statement relationship. Extension of additional credit will depend onBozemans overall liquidity (current ratio) and profitability (ability to generate revenue and cash)over the life of the loan. Similarly, Bozemans credit hist
30、ory is importantits patterns of loanrepayment in the past. No one analytical relationship can provide sufficient information to deter-mine granting of additional credit.There is little uniformity in accounting standards from country to country, although some effortshave been made in this area by the
31、 International Accounting Standards Committee.The International Accounting Standards Committee establishes international accounting stan-dards, although they are by no means universally applied.7-5SOLUTIONS TO BRIEF EXERCISESBRIEF EXERCISE 7-1(a) True.(b) False.(c) True.BRIEF EXERCISE 7-2(a) No.(b)
32、Yes.(c) Yes.BRIEF EXERCISE 7-3(a) No.(b) Yes.(c) Yes.BRIEF EXERCISE 7-4(a)(b)(c)(d)(e)Predictive value.Feedback value.Consistency.Faithful representation.Verifiable.BRIEF EXERCISE 7-5(a) Relevant.(b) Reliability.(c) Consistency.7-6BRIEF EXERCISE 7-6(a)(b)(c)(d)1.2.3.4.BRIEF EXERCISE 7-7(a)(b)(c)(d)2
33、.3.1.4.BRIEF EXERCISE 7-8(a)(b)(c)(d)Conservatism.Conservatism.Materiality.Materiality.BRIEF EXERCISE 7-9Current AssetsCurrent LiabilitiesCashAccounts receivableTotal$ 110,6001,674,400$1,785,000Accounts payableIncome taxes payableOther current liabilitiesTotal$ 584,60025,900608,500$1,219,000(a) Curr
34、ent ratio= Current assets Current liabilities= $1,785,000 $1,219,000= 1.46:1(b) Working capital = Current assets Current liabilities= $1,785,000 $1,219,000= $566,0007-7BRIEF EXERCISE 7-10Gross profitIncome from operationsOther revenues and gainsIncome before income taxesNet incomeBRIEF EXERCISE 7-11
35、$907,000667,000 = Operating expenses (a)240,00036,000276,00096,600 = Income tax expense (b)$179,400Earnings per share= Net income common shares outstanding= $179,400 46,000= $3.907-8SOLUTIONS TO EXERCISESEXERCISE 7-11.2.3.4.5.6.7.8.Revenue recognition principle.Full disclosure principle.Matching pri
36、nciple.Going concern assumption.No violation.Time period assumption.Cost principle.Economic entity assumption.EXERCISE 7-2(a) This is a violation of the cost principle. The inventory was written up toits market value when it should have remained at cost. Thus, no jour-nal entry should have been made
37、.(b) This is also a violation of the cost principle because the equipmentwas recorded at its estimated market value and not its exchange value.The correct journal entry is:Equipment.Cash .41,00041,000(c) This is a violation of the economic entity assumption. The accountingfor the transaction treats
38、Mark Nabke and Vicki Prowitz Company asone entity when they are two separate entities. No journal entry shouldhave been made since Nabke should have used personal assets topurchase the truck. If cash assets of the company were used, the debitentry could be to Accounts ReceivableM. Nabke.(d) This is
39、a question of matching and materiality. The pencil sharpenercould be depreciated to match the expense with revenue since thepencil sharpener has an estimated useful life of 5 years. However, thepencil sharpener should not be depreciated because the cost of it isnot material. Since the cost of the sh
40、arpener is not material, it should7-9EXERCISE 7-2 (Continued)be expensed immediately. The correct journal entry at the time of pur-chase is:Miscellaneous Expense .Cash.EXERCISE 7-35050(a)(b)(c)(d)(e)(f)(g)(h)2.1.7.3.9.4.6.5.Going concern assumption.Economic entity assumption.Full disclosure principle.Monetary unit assumption.Materiality.Time period assumption.Matching principle.Cost principle.EXERCISE 7-41.2.3.4.$9,000. The full amount of the policy should be recognized as revenuebecause the term expired within the current year.$30,000 12 = $2,500; $2,500 X
