FINA 4358-CHAPTER 1 QUIZ

FINA 4358-CHAPTER 1 QUIZ Chapter 1 Introduction to Financial Reporting Homework Q 1-1. Discuss the role of each of the following in the formulation of accounting principles: a. American Institute of Certified Public Accountants – important role in the private sector in establishing GAAP b. Financial Accounting Standards Board – a basis for evaluating the existing standards of financial accounting and reporting c. Securities and Exchange Commission – regulate securities trading in national exchanges, determine GAAP and regulate accounting profession. Q 1-3. The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said, “A year ago we bought a piece of land for $100,000. This year, inflation has driven prices up by 6%, and an appraiser just told us we could easily resell the land for $115,000. Yet our balance sheet still shows it at $100,000. It should be valued at $115,000. That’s what it’s worth. Or, at a minimum, at $106,000.” Respond to this statement with specific reference to the accounting principles applicable in this situation. Historical cost concept because the valuation of the asset doesn’t change the balance sheet value. Q 1-5 A corporation like General Electric has many owners (stockholders). Which concept enables the accountant to account for transactions of General Electric separate and distinct from the personal transactions of the owners of General Electric? The concept separate enables the accountant to account for separate and distinct because this concept states that business is separate from entity of owner. Q 1-7 Because of assumptions and estimates that go into the preparation of financial statements, the statements are inaccurate and are, therefore, not a very meaningful tool to determine the profits or losses of an entity or the financial position of an entity. Comment. Because there’s no alternative to using the financial statements, we have to use those statements that are a little bit inaccurate Q 1-9 Describe the following terms, which indicate the period of time included in the financial statements: a. Natural business year – ends when operations are at low frequency, usually on December 31 b. Calendar year – end on 31st December c. Fiscal year – closing at the end of a month any other than December Q 1-11 Countries have had problems with the stability of their money. Briefly describe the problem caused for financial statements when money does not hold a stable value.