Question

1. a. T of F: Investors are an example of an external user (business stakeholder) of financial information. (If false, identify and correct the errors.)

b. T or F: An employee of a company would be a business stakeholder. (If false, identify and correct the errors.)

         2. a. T or F: Assume you own more than one business. The financial records are prepared separately for each business. The records are also separate and distinct from your personal finances. This methodology relies on the going concern assumption.

b. Which accounting concept requires expenses to be recorded in the same accounting period as the revenues to which they relate?  

____________________________________Why this is important?

_____3. Assume you received services yesterday from your physician, Dr. Ima Pain. You will not you pay the $100 bill for services until next month. The accrual basis method of accounting is used by the Pain Medical Clinic; therefore, wages paid by the Pain Medical Clinic to staff are recorded and reported when incurred.

                 

Wages are considered incurred when the:

                  a. Workers spend their paychecks

                  b. Workers show up at the clinic to work

                  c. Patient pays the bill

                  d. Workers render services, regardless of when the patient pays for services

Accy 306 Quiz #2, page 2 of 3

4. Match accounting assumption with most appropriate statement.

A.	Business Entity	E. Consistency
B.	Time Period	F. Realization
C.	Historical Cost	G. Transaction Approach
D.	Going Concern	H. Full Disclosure

  

a.	Financial statements are prepared periodically.
b.	All significant relevant information is reported.
c.	DSW Shoes routinely sends emails announcing sales for preferred customers, but does not record a sale until a customer makes a purchase.
d.	The company uses the same accounting principle from period to period.
f.	Land is recorded at $25,000, which was the amount paid. Current value of the land is $75,000.
g.	Subscription fees collected in advance are recorded as unearned subscription income and later recognized when earned.
h.	Online retailer Amazon, Inc. is financially sound and will continue in business indefinitely.

_____5. The following data relate to Smith Company for the year ended December 31, 2017. The company uses the accrual basis. (Show work for partial credit)

Sales on credit	$375,000
Cost of inventory sold on credit	170,000
Collections from customers	205,000
Purchase of inventory on credit	185,000
Payment for purchases	125,000
Selling expenses (accrual basis)	65,000
Payment for selling expenses	45,000

Which of the following amounts represents net income for Smith Company for the year ended December 31, 2017?

a. ($10,000)

b. $140,000

c. $35,000

d. $160,000

e. $175,000

What is net income using cash basis?                   ______________

Answer 1

Part 1 (a) - True, Investors are external users of financial statements. They use the financial information for purpose of investment decision.

As per question-External Stakeholders = Business Stakeholder.

Part 1 (b) - False, Employees are not Business Stakeholder (External stakeholder) but are key Internal stakeholders of the entity. They use the financial information for assessing the growth of business for lokking career growth opportunities.

Part 2 (a) - Business Entity Assumption - Business entity assumption assumes that business has its own independent status. In it accounting records of business are maintained separately from the records of owners.

Part 2 (b) - Matching concept - Matching concept folllws the principal of accounting of expenses in the period to which they relate.

This is important to show true financial position and Net Operating income of the entity. Recording of expenses in the different accounting period will impact the results of financial information to be misunderstood.

Part 3 - (d) - When Worker Render the service regardless of when the patient pays for the bill.

Accrual concept of accounting follows the principle of recording expenses on accrual basis even if such expenses are not paid. Hence even if patient does not pay bill, wages need to be recorded for rendering of services by workers

Part 4 - Matching the accounting assumption

Statement	Accounting Assumption
a.	Time Period (Financial statements prepared display the picture of financial position for particular Time Period.)
b.	Full Disclosure (All significant information is fully disclosed to provide the all the information to stakeholders)
c.	Transaction approach (Recording of transaction is required when the monetary event happen. Sending emails is not a transaction)
d.	Consistency (Company uses the accounting policies consistently to adhere to Generally accepted accounting principles and if there is deviation then full explained disclosure is required includinf effects of deviation)
f.	Historical cost ($2500 is historical cost value and $75000 is current market value. Fixed assets of entity are recognised at historical value)
g.	Realization (Subscription fees realised is always unearned until the services are provided to members)
h.	Going Concern (Financial statements are prepared on the basis of going concern assumption.)

Part 5 - Calculation of Net Income (Accrual Basis)

Particulars	Amount
Sales on credit	$375000
Less : Cost of Inventory sold on credit	$170000
Less : Selling expenses	$65000
Net Income	$140000

Calculation of Net Income as per cash basis

Particulars	Amount
Collection from customers	$205000
Less : Payment for purchases	$125000
Less : Selling expenses	$45000
Net Income	$35000