6. (12 Points) Identify what accounting assumption or principle is violated in e
ID: 2340661 • Letter: 6
Question
6. (12 Points) Identify what accounting assumption or principle is violated in each of the following examples: As soon as it purchases inventory, Sokolich Company records the purchase price as cost of goods sold to simplify its accounting procedures. a. Ebert Company prepares financial statements only every two years to reduce its costs of preparing the statements. b. c. Because of inflation, Cross Company adjusts its financial statements each year to show the current purchasing power for all items. At the end of each year, Vann Company reports its economic resources on a liquidation basis even though it is likely to operate in the future. d.Explanation / Answer
A. As soon as it purchases inventory, sokolich Company records the purchase price as cost of goods sold to simplify its accounting procedures.
Ans. As per IAS 2 "Inventory Pricing," permit a similar range of accounting choices in measuring the cost of inventory. Those choices include the use of the retail or standard cost method in estimating the cost of inventory and the use of specific identification; first-in, first-out; average cost; or last-in, first-out in reporting the flow of cost.
B. Ebert Company Prepares Financial Statement only every two years to reduce its cost of preparing the statement.
Ans. It is compulsory for a company to prepare Financial Statement one in every year without fail and file with Registrar of company. To reduce a cost of preparing the statement, company can’t skip the financials.
C. Because of inflation, Cross Company adjusts its financial statements each year to show the current purchasing power for all items.
Ans. Introduction
Current Purchasing Power Accounting (CPPA) is known by different names such as Constant Purchasing Power Accounting (CPPA), General Price Level Accounting (GPLA), Constant Dollar Accounting (in USA), General Purchasing Power Accounting, this method adjusts historical costs for changes in the general level of prices as measured by a general price-level index.
Changes in the general level of prices represent changes in the general purchasing power of the monetary unit. Increases in the general level of prices (inflation) reduce the general purchasing power to purchase goods and services in general; decreases in the general level of prices (deflation) increase the general purchasing power to purchase goods and services in general.
Generally the most broad based consumer goods price index is used. The historical cost figures are multiplied by a conversion factor which is the ratio of the price-level index at the date of conversion and price level index at the transaction date.
And not for all items in financial statements.
D. At the end of each year, Vann Company report its economic resources on a liquidation basis even though it is likely to operate in the future.
Ans. The going concern concept is a fundamental principle of accounting. It assumes that during and beyond the next fiscal period a company will complete its current plans, use its existing assets and continue to meet its financial obligations. Simply put, it is an assumption that the company will stay in business and that the value of its assets will endure. This underlying principle is also known as the continuing concern concept.
As the company report its economic resources on a liquidation basis even though it operate in next year. Liquidation only show in case in next year company can’t operate in future.
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