Acct 201
Homework # 1; Chapter 2
In your own words (do not copy straight from the text) explain the following.
1) Suppose a manufacturer of tables ships a large order to Bob’s Discount Furniture store. What are some of the issues the manufacturer must face in determining when it can recognize revenue? In addition what else must the manufacturer recognize at the time revenue is recognized?
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2) Explain the concept of comprehensive income. What does it include?
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3) Using the equation A = L+OE explain the effects of the following transactions:
a. A transaction in which revenue is recognized
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b. A transaction in which expense is recognized
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c. A transaction in which we purchase our inventory on credit
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d. A transaction in which we purchase a machine on credit.
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e. A transaction in which cash dividends are distributed.
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4) What is the importance of the enhancing qualities of comparability and consistency to the financial statements?
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5) Suppose a financial statement excludes an estimate of expected bad debt because by including it, net income would be reduced and perspective investors might turn away. What qualitative characteristics (could be more than one) have been violated. Explain your answer in a sentence or two.
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6) We buy a machine that is expected to last several years. Explain why company A has classified the machine as an asset and why company B as an expense. Can both companies be correct?
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7) Verifiability is an enhancing qualitative characteristic. You are auditing the account receivable balance of the “The Keystone Paper Company.” How would you verify that the amount of the receivable shown on the balance sheet is accurate?
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