Mastery Problem Preparing Financial Statements Accounting Concepts (week3 assignment acc201)

Mastery Problem: Preparing Financial Statements Accounting Concepts Should we buy stock in a company? Should we extend a line of credit to a company? Should we continue with current operations or change how we do business? These are the types of questions stakeholders ask themselves. Stakeholders require useful accounting information in order to make accurate financial decisions. In accordance with a generally accepted accounting principles (GAAP),a company’s financial statement must contain accurate accounting information and is used in financial reporting. How do you know whether accounting information is useful? Review each of the accounting concepts below that describe the qualitative characteristics of accounting information. Business entity concept Cost concept Going concern concept Matching concept Objectivity concept Unit of measure concept Adequate disclosure concept Accounting period concept In each of the following scenarios, which accounting concept is being violated? 1. A major explosion at your company's main production facility caused a two-month stoppage of operations during a busy time of year. It went unreported because the accountant said its dollar effect was too low. Adequate disclosure concept 2. Because of recent technological breakthroughs in your company's main product, the selling price has increased and the accountants have increased the value of the company's inventory. Objectivity concept 3. The accountants at your company have decided to state the financial statements in euros because the company does a lot of business in Italy. Unit of measure concept 4. Your company's monthly income statement shows the highest monthly revenue earned this year (in July) compared to the highest amount paid for each expense so far this year. Matching concept 5. Your company recently filed for bankruptcy. Going concern concept 6. Building construction costs have skyrocketed in your area, making your company's building significantly more valuable, so the accounting records have been updated to reflect the estimated selling price for this asset. Cost concept 7. Most of your company's sales occur in the fall, so a summary income statement was issued for Spring-Summer of the current year. Accounting period concept 8. A completely separate company from the one with which you are concerned may not make it through the year. This information was included in your company's financial statements. Business entity concept Feedback Roll over each definition of a qualitative characteristic above to review its definition and scope. 1. Adequate disclosure concept: A major explosion at your company's main production facility caused a two-month stoppage of operations during a busy time of year. It went unreported because the accountant said its dollar effect was too low. 2. Objectivity concept: Because of recent technological breakthroughs in your company's main product, the selling price has increased and the accountants have increased the value of the company's inventory. 3. Unit of measure concept: The accountants at your company have decided to state the financial statements in euros because the company does a lot of business in Italy. 4. Matching concept: Your company's monthly income statement shows the highest monthly revenue earned this year (in July) compared to the highest amount paid for each expense so far this year. 5. Going concern concept: Your company recently filed for bankruptcy. 6. Cost concept: Building construction costs have skyrocketed in your area, making your company's building significantly more valuable, so the accounting records have been updated to reflect the estimated selling price for this asset. 7. Accounting period concept: Most of your company's sales occur in the fall, so a summary income statement was issued for Spring-Summer of the current year. 8. Business entity concept: A completely separate company from the one with which you are concerned may not make it through the year. This information was included in your company's financial statements.