Question

For each of the following situations, indicate whether you agree or disagree with the financial reporung plduull employed and state the accounting concept that is applied (if you agree) or violated (if you disagree). 1. Wagner Corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar. 2. Spooner Oil Company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. No mention of the change was included in the financial statements. The change had a material effect on Spooner's financial statements. 3. Cypress Manufacturing Company purchased machinery having a five-year life. The cost of the machinery is being expensed over the life of the machinery. 4. Rudeen Corporation purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000. 5. Davis Bicycle Company received a large order for the sale of 1,000 bicycles at $ 100 each. The customer paid Davis the entire amount of $100,000 on March 15. However, Davis did not record any revenue until April 17, the date the bicycles were delivered to the customer. 6. Gigantic Corporation purchased two small calculators at a cost of $32.00. The cost of the calculators was expensed even though they had a three-year estimated useful life. 7. Esquire Company provides financial statements to external users every three years.

Answer 1

1. Agreed, if permitted by regulatory agencies, as reporting at purchasing power level, it provides more relevant and reliable information than historical cost method. It follows the replacemennt cost concept. But it violates the cost concept which advocates carrying assets and liabilities at price paid to avoid comparison problems, estimation difficulties of replacement costs.

2. The practice is not agrreable. It must have been disclosed in notes to accounts the changes in Accounting policy and its impact on the financial statements. Principle of Full disclosure is voilated. It also violates consistency principle unless change is permitted and disclosed in the financial statements.

3. It is agreeable practice. The depreciation expense is allocated over the useful life of the machine. Costs are recorded against the revenue recognised in the period. Matching concept is followed.

4. Agreed as IFRS permits it. Relevance of asset value to the current trends and the value is reliable. But it violates the cost concept.

5. It is an agreed practice. Revenue is recognised when it is earned. The money received is an advance and until sale takes place, it is considered as liability only. This is accruals or revenue recognition concept.

6. Practice is agreed. The amount spent on calculators is significantly immaterial. The practice follows the accounting concept of materiality.

7. Not agreed. Disclosing after 3 years means stakeholders are not timely informed. It violates the accounting concept of full disclosure.