Question

Label which is which.

options are

Economic Entity

Comparability

Predictive Value

Cost-effectiveness

Materiality

Jim Cratchit is the sole owner of Cratchit Plumbing. Jim recently borrowed $100,000 for purchase of a new home to be used as his personal residence. The liability was not recorded in the records of Cratchit Plumbing.

A large company immediately expensed a $250 purchase of replacement shelving for the supply room in its corporate office even though the shelving will be used for several years.

A new company in the oil & gas industry chose to use the LIFO cost flow assumption for inventory because the vast majority of other companies in the industry use LIFO.

A company could disseminate its financial statements two days earlier if it shifted resources from other operations, but decides the value of the earlier report is not worth the added commitment of resources.

Revenues and expenses are reported separately from, and before, gains and losses on the income statement because they are more likely to recur in the future.

Answer 1

1. Economic Entity : Jim Cratchit is the sole owner of Cratchit Plumbing. Jim recently borrowed $100,000 for purchase of a new home to be used as his personal residence. The liability was not recorded in the records of Cratchit Plumbing.

Reason : The economic entity principle is an accounting principle that states that a business entity's finances should be keep separate from those of the owner, partners, shareholders, or related businesses. This is the reason that loans borrowed for personal residence is not shown in books of accounts.

2. Comparability : A new company in the oil & gas industry chose to use the LIFO cost flow assumption for inventory because the vast majority of other companies in the industry use LIFO.

Reason : A quality of accounting information that facilitates the comparison of financial reporting of one company to the financial reporting of another company. This is the reason for changing method to LIFO.

3. Predictive Value : A large company immediately expensed a $250 purchase of replacement shelving for the supply room in its corporate office even though the shelving will be used for several years.

Reason : Predictive value refers to the fact that quality financial information can be used to base predictions, forecasts, and projections on. In this case shelving has life but it is not offering economic benefits over number of years.

4. Cost-effectiveness : A company could disseminate its financial statements two days earlier if it shifted resources from other operations, but decides the value of the earlier report is not worth the added commitment of resources.

Reason : A transaction is cost-effective when the greatest benefit is gained for a comparatively low price. But in above case it is not cost effective so resources are not diverted.

5. Materiality : Revenues and expenses are reported separately from, and before, gains and losses on the income statement because they are more likely to recur in the future.

Reason : The materiality concept refers to a situation where the financial information of a company is considered to be material from the point of view of the preparation of the financial statements if it has the potential to alter the view or opinion of a reasonable person. This is the reason that revenues and expenses are reported separately from gains and losses.