In each of the following cases, indicate the principle that appears to have been violated:
Case A For its factory equipment, Unrequited Love Inc. used accelerated depreciation in 20X2; straight-line in 20X3; and accelerated 20X4.
Case B Aaronist Ltd, sold a tract of land on credit by accepting a $55,000, two-year, non-interest-bearing note.
Case C JED Inc, always issues its annual financial report period to ensure greater accuracy.
Case D Idiomatic Inc always recognizes its revenue when received in cash.
Case E RBI Corporation records interest income only on the payment dates.
Case F Loran Co. includes among its financial statement elements an apartment dates.
Case G Adam Ltd's CEO refuses to permit the company to use notes or supplementary schedules in its financial reports because he believes that financial statements are self-explanatory.
Accounting princilples means rule of action or conduct that should be followed to maintain the accuracy and standard of accounting. In other meaning Accounting Principles are guidelines to establish standards for sound accounting practices and procedures in reporting the financial status and periodic performance of a business.
Accounting Principles can be classified into two categories:
1.Accounting concepts
2.Accounting conventions
Explanation of above mentioned cases:-
Case A
For its factory equipment, Unrequited Love Inc. used accelerated depreciation in 20X2; straight-line in 20X3; and accelerated 20X4.-In this case there is violation of Convention of Consistency.
About convention of consistency-According to this convention accounting rules,conventions and practices should be continuously observed and applied, these should not change from one year to anthor year. This convention should be followed because of results of different years will be comparable only when accounting rules are continuously adhered to from year to year. In the case if the method of depriciation for the same industry changed from year to year it will be difficult to compare the asset value form year to year.
Case B
Aaronist Ltd, sold a tract of land on credit by accepting a $55,000, two-year, non-interest-bearing note-In this case there is violation of realisation concept
About Realisation Concept-According to this concept revenue is considered as being earned on the date at which it is realised, on the date when the property passes to the buyer and he becomes legally liable to pay. In the case though the owner will pay after 2 year the revenue recognised on the land in the current year in which year the asset transfers to owner.
Case C
JED Inc, always issues its annual financial report period to ensure greater accuracy-In this case violation of Accounting Period Concept
About Accounting Period Concept-Under the going concern concept it is assumed that a business entity has areasonable expectation of continuing business for an indefinite period of time. This assumption provides much of the justification thet the business will not be terminated, so it is reasonable to divide the life of the business into accounting periods so as to be able to know the profit or loss of each such period and the financial position at the end of period. Normally accounting period adopted is one year as it helps to calculate income tax,to absorb the seasonal fluctuations etc. So the financial reporting period should be followed on consisitency basis not according to ensure greater accuracy.
Case D
Idiomatic Inc always recognizes its revenue when received in cash-In this case there is violation of Accural Concept
About Accural Concept-According to this concept revenue is recognised when it is realised, that is when sale is complete or services are given and it is immaterial whether cash is received or not. To ascertain correct profit and loss for the accounting period, we make record of all expenses and income relating to the accounting period whether actual cash has been paid or received or not.
Case E
RBI Corporation records interest income only on the payment dates -In this case there is violation of Accural Concept
About Accural Concept-According to this concept revenue is recognised when it is realised, that is when sale is complete or services are given and it is immaterial whether cash is received or not. To ascertain correct profit and loss for the accounting period, we make record of all expenses and income relating to the accounting period whether actual cash has been paid or received or not.
Case G
Adam Ltd's CEO refuses to permit the company to use notes or supplementary schedules in its financial reports because he believes that financial statements are self-explanatory-In this case there is violation of Convention of Full Disclosure
About Convention of Full Disclosure-According to this concept all the important informations which are of material interest to creditors,investors should be disclosed in accounting statements. This convention ensures that essential informations should be recorded in the statement so that there is no chance of any material information being left out. Fro example,the valuation of fixed assets, investments, stocks etc.So the informations should be disclosed within the statement or in the notes or supplementary schedules in the reports.
In each of the following cases, indicate the principle that appears to have been violated: Case...