Question

For each of the following situations, write if you agree or disagree with the financial reporting practices used and briefly explain the reasons that justify your response.

1. The Cantor Corporation accountant increased the book value of the patent from its cost of $ 1 million to its newly valued value of $ 6 million.
2. Stanton Corporation paid for personal travel from its chief financial officer and charged the travel expense.
3. At the end of the fiscal year 2013 fiscal year, Dower, Inc., received a consumer order for $ 60,000. The merchandise will be shipped early in the year 2014. Because this sale is made to a consumer that has been for a long period of time and the invoice was paid in 2013, the auditor recorded the sale in 2013.
4. In the middle of fiscal year 2013, Sanguinetti, Inc., paid $ 12,000 to your insurance company for one year of coverage comprehensively. Sanguinetti recorded the expenditure in 2013.
5. The pharmacy company Churchill included a note in its financial statements that describes a pending lawsuit against the company.
6. Daily Corporation, a company whose securities are publicly traded, prepares monthly, quarterly and annual financial statements for internal use but only made annual financial statements available to external entities.

Answer 1

The different situations given in the question along with their agreement or disagreement and the reasons are given as follows:-

Situation	Agree/Disagree	Reason
1.	Disagree	Increasing of value of Patent from its book value to newly valued value is a violation of the historical cost principle. Historical cost principle means valuing the asset at its original transaction value.
2.	Disagree	This is a violation of economic entity assumption. In economic entity assumption, the owner is treated as different from the entity and any personal expense should be considered as drawings.
3.	Disagree	This is a violation of the appropriate revenue recognition. The given sale should be recorded in the year 2014.
4.	Agree	The given situation is conforming to appropriate expense recognition.
5.	Agree	The company is conforming to the full disclosure principle.
6.	Disagree	This is a violation of the periodicity assumption. As there is no a single time period assumption for preparation of financial statements.