Question

Listed below are several statements that relate to financial accounting and reporting. Identify the basic assumption, broad accounting principle, or component that applies to each statement.
1. Jim Marley is the sole owner of Marley's Appliances. Jim borrowed $100,000 to buy a new home to be used as his personal residence This liability was not recorded in the records of Marley's Appliances
2. Apple Inc. distributes an annual report to its shareholders
3. Hewlett-Packard Corporation depreciates machinery and equipment over their useful lives
4. Crosby Company lists land on its balance sheet at $120,000, its original purchase price, even though the land has a current fair value
5. delivered to customers, even though the cash has not yet been
6. Liquidation values are not normally reported in financial statements of $200,000 Honeywell International Inc. records revenue when products are received even though many companies do go out of business
7. IBM Corporation, a multibillion dollar company, purchased some small tools at a cost of $800. Even though the tools will be used for a number of years, the company recorded the purchase as an expense

Answer 1

Answer:

1. Jim Marley is the sole owner of Marley's Appliances. Jim borrowed $100,000 to buy a new home to be used as his personal residence This liability was not recorded in the records of Marley's Appliances

• ECONOMIC ENTITY PRINCIPLE: the activities of a business must be kept separate form the activities of its owners

2. Apple Inc. distributes an annual report to its shareholders

• TIME PERIOD PRINCIPLE: companies must report their financial statements over standard or fixed periods of time, e.g. monthly, quarterly or annually

3. Hewlett-Packard Corporation depreciates machinery and equipment over their useful lives

• EXPENSE RECOGNITION: expenses must be recorded during the time periods that they actually occur

4. Crosby Company lists land on its balance sheet at $120,000, its original purchase price, even though the land has a current fair value

• HISTORICAL COST PRINCIPLE: assets must be recorded at purchase cost and the only adjustment can be accumulated depreciation

5. delivered to customers, even though the cash has not yet been

• THIS PART IS INCOMPLETE, BUT I BELIEVE IT REFERS TO THE REVENUE RECOGNITION PRINCIPLE: revenue must be recognized once the earning process has been completed and not necessarily when the cash is received.

6. Liquidation values are not normally reported in financial statements of $200,000 Honeywell International Inc. records revenue when products are received even though many companies do go out of business

• GOING CONCERN PRINCIPLE: this principle assumes that the business will continue to operate in the foreseeable future

7. IBM Corporation, a multibillion dollar company, purchased some small tools at a cost of $800. Even though the tools will be used for a number of years, the company recorded the purchase as an expense

• MATERIALITY: a company must record all the transactions that may affect the decision making processes. In this case, a tool will not make any difference on a multibillion dollar company.