Question

CP 1-9 Financial statements are prepared according to a number of accounting principles, some of which are listed below: 1. Business entity 2. Going concern 3. Stable monetary unit 4. Historical cost 5. Revenue recognition 6. Consistency 7. Full disclosure 8. Matching 9. Materiality Required: Identify the principle that would apply in each of the following situations. Explain your choice. a. An accountant for Caldwell Corporation records a $25 stapler with a five-year life as an expense. Caldwell has total assets of $1,000,000. b. Fred Rozak, an independent consultant, must keep a set of books for his consulting firm and a separate set of books for his personal records. C. A machine is recorded at its purchase price of $9,000 and is not revalued at the end of the accounting period to reflect its market value of $10,000. Land purchased in 1985 for $10,000 is not revalued even though it would take $30,000 in equivalent money to purchase the land today. Accountants of Hull Corporation do not record the value of its production equipment at the much lower amount for which it could be sold in the near future. Investors of Spellman Corporation note that the accounting policy for valuing inventory has not changed from the prior fiscal year. g. Looten Corporation senior managers decide to disclose a recent $2 million lawsuit in a note to the financial statements even though the case will not likely be settled for two years.

Answer 1

a) Materiality, since stapler even through has a five year life, can be recorded as expenses instead of capitalisation as $ 25 will not have a material impact on the net income. b) Business entity, Business owner should maintain separate records for business purpose and personal purpose each. c) Historical cost, It requires each economic transaction should be recorded at original cost even it has fair value more than cost. d) Stable Monetary unit, Under this financial information needs to be stated with stable units of money. e) Going concern, business will continue for the foreseeable future. So can continue with the existing values. f) Consistency, under this business need to use the same accounting policy every year uniformly. g) Full disclosure, under sufficient information has to be communicated to all the users for their decision making.