1) GAAP states that if it is impractical to determine the cumulative effect of applying a
change in accounting principle to prior periodssuch as when a firm adopts the LIFO
inventory accounting methodthe new accounting principle is to be applied as if the
change was made prospectively as of the earliest date practicable.
2) When sales returns occur, they are debited to the sales account.
3) Commercial lending agreements may contain provisions that are designed to protect
the lender from a deterioration of the borrower’s creditworthiness.
4) The convention in accounting that strives to ensure business risks and uncertainties
are adequately reflected in the financial statements is conservatism.
5) The formula to convert the cost of goods sold under LIFO to an estimate of the cost
of goods sold under FIFO is: Cost of goods sold LIFO – increase in LIFO reserve = cost
of goods sold FIFO.
6) The method of measuring long-lived assets at their estimated value in an output
market is the expected benefit approach.
7) Employees demand financial information to monitor the health of
company-sponsored pension plans.
8) If a company sells an asset for a profit of $175,000 and immediately leases it back
with a capital lease, the gain on the sale is recognized immediately as an ordinary gain.
9) The “quality of information” as applied to financial reporting refers to the degree to
which financial statements are grounded in facts and sound judgments and thus are free
from distortion.
10) When accounting for an operating lease, a liability is recognized when the lease is
signed by the lessee.
11) The matching principle says that expenses are matched to the revenue recognized
during the period, not that revenues are matched to the period’s expenses.