Question

The following list of statements poses conceptual issues: Required: 1 and 2. Indicate whether each statement is correct or incorrect and identify the principle(s) posited. Correctness Principle a. Issue The business entity is considered separate and apart from its owners for accounting purposes. b. A transaction is always recorded in such a way as to reflect its legal form. It is permissible for a company to use straight-line depreciation, even though the rest of c. the industry uses declining-balance, because the company believes straight-line better reflects the pattern of benefits received from these assets. d. All details of transactions must be disclosed in the notes to the financial statements. e. The lower-of-cost-and-net realizable value method must be used in valuing inventories. f. The cost principle relates only to the income statement. g. Revenue should be recognized only when cash is received. h. Accruals and deferrals are necessary because of the separate-entity assumption. i. Revenue should be recognized as late as possible and expenses as early as possible.

Options:

Correctness: Correct or Incorrect

Principle:

a. Faithfull representation

b. Faithful representation (Full disclosure) Materiality

c. Faithful representation (Net asset principle)

d. Historical Cost Measurement

e. Historical cost measurement and Net asset principle, Full disclosure materiality and separate-entity

f. Matching; Comparability

g. Matching; Time-period assumption

h. Revenue and Historical cost measurement

i. Revenue and matching; Faithful representation and Freedom from bias

j. Revenue recognition

k. Separate-entity

l. Time-period assumption

Answer 1

	Issue	Correctness	Principle	Explanation
a.	The business entity is considered separate and apart from its owners for accounting purposes.	Correct	Separate-entity	As per separate principle, the business entity and its owners are treated as distinct persons.
b.	A transaction is always recorded in such a way as to reflect its legal form.	Incorrect	Faithfull representation	Faithfull representation requires a transaction should be recorded in such a way that it represents economic substance rather than mere legal form.
c.	It is permissible for a company to use straight-line depreciation, even though the rest of the industry uses declining-balance, because the company believes straight-line better reflects the pattern of benefits received from these assets.	Correct	Matching; Comparability	Various depreciation methods allowed for achieving the matching principle.
d.	All details of transactions must be disclosed in the notes to the financial statements.	Incorrect	Faithful representation (Full disclosure) Materiality	All relevant material information must be disclosed in the notes to the financial statements but not all the transactions.
e.	The lower-of-cost-and-net realizable value method must be used in valuing inventories.	Correct	Revenue and matching; Faithful representation and Freedom from bias	This principle allows to anticipate and disclose losses and the same is not allowed for gains.
f.	The cost principle related only to income statement.	Incorrect	Historical Cost Measurement	The cost principle is related to income statement as well as balance sheet.
g.	Revenue should be recognized only when cash is received.	Incorrect	Revenue recognition	Revenue is recognized as soon as a product has been sold or a service has been performed, regardless of the receipt of cash.
h.	Accruals and deferrals are necessary because of the separate-entity assumption.	Incorrect	Time-period assumption	Accruals and deferrals are necessary because of time period assumption which requires the transactions occurred in a particular time period should be recorded in that particular time period.
i.	Revenue should be recognized as late as possible .and expenses as early as possible.	Incorrect	Matching; Time-period assumption	This principle requires the expenses to be matched with revenues. No deferment is possible.