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Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the expense recognition principle. Indicate the basic nature of each of these expense recognition methods and give two examples of each.
Mogilny Company paid $135,000 for a machine. The Accumulated Depreciation—Equipment account has a balance of $46,500 at the present time. The company could sell the machine today for $150,000. The company president believes that the company has a “right to this gain.” What does the president mean by this statement? Do you agree?
Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service?
What are the five steps used to determine the proper time to recognize revenue?
What is a performance obligation, and how is it used to determine when revenue should be recognized?
Explain the revenue recognition principle.
Briefly describe the fair value hierarchy
What is the fair value option? Explain how use of the fair value option reflects application of the fair value principle.
What is the definition of fair value?
The chairman of the board of directors of the company for which you are chief accountant has told you that he has little use for accounting figures based on historical cost.
\r\nHe believes that replacement values are of far more significance to the board of directors than “out-of-date costs.” Present some arguments to convince him that accounting data should still be based on historical cost.
What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?
The life of a business is divided into specific time periods, usually a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period.
\r\n(a) This practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption.
\r\n(b) What has been the effect of this practice on accounting?
\r\nWhat is its relation to the accrual system? What influence has it had on accounting entries and methodology?
What are the four basic assumptions that underlie the financial accounting structure?
Revenues, gains, and investments by owners are all increases in net assets. What are the distinctions among them?
Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?
Why is it necessary to develop a definitional framework for the basic elements of accounting?
What is the distinction between comparability and consistency?
According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.
What are the enhancing qualities of the qualitative characteristics?
\r\nWhat is the role of enhancing qualities in the conceptual framework?
How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and mea-sures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?
Briefly describe the two fundamental qualities of useful accounting information
What is meant by the term “qualitative characteristics of accounting information”?
What is the primary objective of financial reporting?
What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?
The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marks-and- Spencer-Annual-report-and-financial-statements-2012.pdf.
\r\nInstructions
\r\nRefer to M&S’s financial statements and the accompanying notes to answer the following questions.
\r\n(a) What is the company’s main line of business?
\r\n(b) In what countries does the company operate?
\r\n(c) What is the address of the company’s corporate headquarters?
\r\n(d) What is the company’s reporting currency?
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