Accounting Concepts Should we buy stock in a company? Should we extend a line of

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Accounting Concepts Should we buy stock in a company? Should we extend a line of credit to a company? Should we continue with current operations or change how we do business? These are the types of questions stakeholders ask themselves. Stakeholders require useful accounting information in order to make accurate financial decisions. In accordance with a generally accepted accounting principles (GAAP),a company's financial statement must contain accurate accounting information and is used in financial reporting How do you know whether accounting information is useful? Review each of the accounting concepts below that describe the qualitative characteristics of accounting information. Business entity Cost concept Going concern concept Matching concept concept Unit of measure Adequate disclosure Accounting period concept Objectivity concept In each of the following scenarios, which accounting concept is being violated? 1. A major explosion at your company's main production facility caused a two-month stoppage of operations during a busy time of year. It went unreported because the accountant said its dollar effect was too low 2. Because of recent technological breakthroughs in your company's main product, the selling price has increased and the accountants have increased the value of the company's inventory. 3. The accountants at your company have decided to state the financial statements in euros because the company does a lot of business in Italy. 4. Your company's monthly income statement shows the highest monthly revenue earned this year (in July) compared to the highest amount paid for each expense so far this year. 5. Your company recently filed for bankruptcy. 6. Building construction costs have skyrocketed in your area, making your company's building significantly more valuable, so the accounting records have been updated to reflect the estimated selling price for this asset 7. Most of your company's sales occur in the fall, so a summary income statement was issued for Spring-Summer of the current year. 8. A completely separate company from the one with which you are concerned may not make it through the year. This information was included in your company's financial statements concept concept

Explanation / Answer

1. Adequate disclosure concept - By way of footnotes, schedules, notes it is the ability of the company to disclose comprehensive and clear information useful for the readers and stake holders of the company. Hence it has violated Adequate disclosure concept by not disclosing information about the explosion.

2.Objectivity concept - For recording any entry in books of accounts it should have solid evidence which should be the sole objective of the company. Since accountants have increased the value of inventory without any evidence it has violated objectivity concept.

3. Unit of measure concept - Since in accounting every recorded event or transaction is measured in terms of money, generally local currency as prevailing in the country. Since company considers number of transactions for deciding the reporting currency it has violated this concept.

4. Matching concept - A company is said to be doing proper accounting when it recognises revenue and its related expenses in the same financial year / accounting period. Since it has only considered revenue for July and compared the same with expenses of whole year it has violated in Matching concept.

5. Going concern concept - It indicates that company is either not willing to continue or can't continue because of financial health of the company is in bad state. Company has to come forth and declare the status whether it will continue or not. In this case it has filed bankcruptcy which indicates it is not going to continue.

6. Matching concept - In continuation of above mentioned 4th point, matching cost concept is applied to avoid misstaing of earnings. Since accounting records have been updated to reflect the estimated selling price since construction costs have increased it has violated this concept.

7. Accounting period concept - In this concept it covers the span of time covered by a set of financial statements. This period also defines the time range over which business transactions are accumulated into financial statements and hence in this case it has violated accounting period concept.

8. Business entity concept - In this concept transactions associated with business must be separately recorded from those of its owners or other businesses. Separate accounting records must be maintained while doing so which excludes assets and liabilities of any other business.

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