E2-3 (Qualitative Characteristics) The Conceptual Framework identifies the qualitative characteristics

that make accounting information useful. Presented below are a number of questions related to
these qualitative characteristics and underlying constraint.

(a) What is the quality of information that enables users to confirm or correct prior expectations?

(b) Identify the overall or pervasive constraint developed in the Conceptual Framework.

(c) A noted accountant once remarked, “If it becomes accepted or expected that accounting
principles are determined or modified in order to secure purposes other than economic
measurement, we assume a grave risk that confidence in the credibility of our financial information
system will be undermined.” Which qualitative characteristic of accounting information should
ensure that such a situation will not occur? (Do not use faithful representation.)

(d) Muruyama Group switches from FIFO to average-cost and then back to FIFO over a 2-year period.
Which qualitative characteristic of accounting information is not followed?

(e) Assume that the profession permits the savings and loan industry to defer losses on investments
it sells, because immediate recognition of the loss may have adverse economic consequences on the
industry. Which qualitative characteristic of accounting information is not followed? (Do not use
relevance or faithful representation.)

(f) What are the two fundamental qualities that make accounting information useful for decision-
making?

(g) Watteau Inc. does not issue its first-quarter report until after the second quarter’s results are
reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

(h) Predictive value is an ingredient of which of the two fundamental qualities that make accounting
information useful for decision-making purposes?

(i) Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line
basis. Which qualitative characteristic of accounting information may not be present?

(j) Nadal Company has attempted to determine the replacement cost of its inventory. Three
different appraisers arrive at substantially different amounts for this value. The president,
nevertheless, decides to report the middle value for external reporting purposes. Which qualitative
characteristic of information is lacking in these data? (Do not use reliability or representational
faithfulness.)
E2-7 (Assumptions, Principles, and Constraint) Presented below are a number of operational
guidelines and practices that have developed over time. Instructions Select the assumption,
principle, or constraint that most appropriately justifies these procedures and practices. (Do not use
qualitative characteristics.)

(a) Fair value changes are not recognized in the accounting records.

(b) Accounts receivable are recorded for sales on account rather than waiting until cash is received.

(c) Financial information is presented so that investors will not be misled.

(d) Intangible assets are capitalized and amortized over periods benefited.

(e) Brokerage companies use fair value for purposes of valuing financial securities.

(f) Each enterprise is kept as a unit distinct from its owner or owners.

(g) All significant post-statement of financial position events are reported.

(h) Revenue is recorded at point of sale.

(i) All important aspects of bond indentures are presented in financial statements.

(j) Rationale for accrual accounting.

(k) The use of consolidated statements is justified.

(l) Reporting must be done at defined time intervals.

(m) An allowance for doubtful accounts is established.

(n) All payments out of petty cash are charged to Miscellaneous Expense.

(o) Goodwill is recorded only at time of purchase.

(p) Cash received and paid is not the basis used to recognize revenues and expenses.

(q) A company charges its sales commission costs to expense.

E 7-1 (Determine Cash Balance) The controller for Wallaby Co. is attempting to determine the
amount of cash and cash equivalents to be reported on its December 31, 2015, statement of
financial position. The following information is provided.

1. Commercial savings account of £600,000 and a commercial checking account balance of £800,000
are held at First National Bank of Olathe.

2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Wallaby to
write checks on this balance, £5,000,000.

3. Travel advances of £180,000 for executive travel for the first quarter of next year (employee to
reimburse through salary reduction).

4. A separate cash fund in the amount of £1,500,000 is restricted for the retirement of long-term
debt.

5. Petty cash fund of £1,000.

6. An I.O.U. from Marianne Koch, a company customer, in the amount of £150,000.

7. A bank overdraft of £110,000 has occurred at one of the banks the company uses to deposit its
cash receipts. At the present time, the company has no deposits at this bank.

8. The company has two certificates of deposit, each totaling £500,000. These CDs have a maturity of
120 days.

9. Wallaby has received a check that is dated January 12, 2016, in the amount of £125,000.

10. Wallaby has agreed to maintain a cash balance of £500,000 at all times at First National Bank of
Olathe to ensure future credit availability.

11. Wallaby has purchased £2,100,000 of commercial paper of Sergio Leone Co. which is due in 60
days.

12. Currency and coin on hand amounted to £7,700.

EXERCISE 7-1 (10–15 minutes)

(a) Cash includes the following:

1. Commercial savings account—

First National Bank of Olathe ...................................... $ 600,000

1. Commercial checking account—

First National Bank of Olathe .......................................... 800,000

2. Money market fund—Volonte ....................................5,000,000

5. Petty cash.......................................................... ....... 1,000

11. Commercial Paper (cash equivalent)...........................2,100,000

12. Currency and coin on hand............................................ 7,700

Cash reported on December 31, 2010, balance sheet ......... $8,508,700

(b) Other items classified as follows:

3. Travel advances (reimbursed by employee)* should be reported

as receivable—employee in the amount of $180,000.

4. Cash restricted in the amount of $1,500,000 for the retirement of long-term debt should be
reported as a noncurrent asset identi-fied as “Cash restricted for retirement of long-term debt.”

6. An IOU from Marianne Koch should be reported as a receivable in the amount of $150,000.

7. The bank overdraft of $110,000 should be reported as a current liability.**

8. Certificates of deposits of $500,000 each should be classified as temporary investments

*If not reimbursed, charge to prepaid expense.

**If cash is present in another account in the same bank on which theoverdraft occurred, offsetting
is required
E7-4 (Determine Ending Accounts Receivable) Your accounts receivable clerk, Mary Herman, to
whom

you pay a salary of $1,500 per month, has just purchased a new Audi. You decided to test the
accuracy of

the accounts receivable balance of $117,000 as shown in the ledger.

The following information is available for your first year in business.

(1) Collections from customers $198,000

(2) Merchandise purchased 320,000

(3) Ending merchandise inventory 70,000

(4) Goods are marked to sell at 40% above cost

Instructions

Compute an estimate of the ending balance of accounts receivable from customers that should
appear in

the ledger and any apparent shortages. Assume that all sales are made on account

EXERCISE 7-4 (10–15 minutes)

Computation of cost of goods sold:

Merchandise purchased .............................................. $320,000

Less: Ending inventory............................................... 70,000

Cost of goods sold.........................................................$250,000

Selling price = 1.4 (Cost of good sold)

= 1.4 ($250,000)

= $350,000

Sales on account........................... $350,000

Less: Collections ....................... 198,000

Uncollected balance..................... 152,000

Balance per ledger........................ 117,000

Apparent shortage........................ $ 35,000 —Enough for a new car