EXERCISE 2.10 (Continued)
(c) Assets should be recorded at the fair value of what is given up or the
fair market value of what is received, whichever is more clearly
evident. It should be emphasized that it is not a violation of the
measurement principle (historical cost) to use the fair value of the
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 2.1 (Time 20–25 minutes)
CA 2.2 (Time 25–35 minutes)
Purpose—to provide the student with the opportunity to identify and discuss the benefits of the con–
CA 2.3 (Time 25–35 minutes)
Purpose—to provide the student with some familiarity with the Conceptual Framework. The student is
CA 2.4 (Time 30–35 minutes)
Purpose—to provide the student with some familiarity with the Conceptual Framework. The student is
CA 2.5 (Time 25–30 minutes)
CA 2.6 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to assess different points to report costs as
CA 2.7 (Time 20–25 minutes)
Purpose—to provide the student with familiarity with the expense recognition principle in accounting.
CA 2.8 (Time 20–30 minutes)
CA 2.9 (Time 20–30 minutes)
CA 2.10 (Time 20–25 minutes)
CA 2.11 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to discuss the cost constraint.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 2.1
(a) A conceptual framework is a coherent system of concepts that flow from an objective. Some
compare it to a constitution. Its objective is to provide a coherent system of interrelated objectives
and fundamentals that can lead to consistent standards and that prescribes the nature, function,
and limits of financial accounting and financial statements.
(b) The FASB has issued eight Statements of Financial Accounting Concepts (SFAC) that relate to
business enterprises. Their titles and a brief description of the focus of seven of these Statements
are as follows:
(1) SFAC No. 1, “Objectives of Financial Reporting by Business Enterprises,” presents the goals
CA 2.2
(a) FASB’s Conceptual Framework should provide benefits to the accounting community such as:
CA 2.2 (Continued)
(b) The most important quality for accounting information is its usefulness for decision-making.
(c) There are a number of key characteristics or qualities that make accounting information useful for
decision-making. The importance of three of these characteristics or qualities is discussed below.
(1) Understandability—information provided by financial reporting should be comprehensible to
CA 2.3
(a) The basic objective is to provide financial information about the reporting entity that is useful to
present and potential equity investors, lenders, and other creditors in making decisions about
providing resources to the entity.
(b) The purpose of this statement is to set forth fundamentals on which financial accounting and
reporting standards may be based. Without some basic set of objectives that everyone can agree
CA 2.4
(a) (1) Relevance is one of the two primary decision-specific characteristics of useful accounting
information. Relevant information is capable of making a difference in a decision. Relevant
information helps users to make predictions about the outcomes of past, present, and future
(3) Understandability is a user-specific characteristic of information. Information is understandable
when it permits reasonably informed users to perceive its significance. Understandability is a
(b) (Note to instructor: Many answers are possible here. The suggestions below are intended to
serve as examples).
(1) Forecasts of future operating results and projections of future cash flows may be highly relevant
to some decision makers. However, they would not be as free from error as historical cost
information about past transactions.
CA 2.5
(a) Recognition when cash is received is not appropriate unless the magazines are delivered to the
customer at the same time. That is, the revenue recognition principle indicates that companies
recognize revenue when each performance obligation is satisfied. This occurs when the products
are delivered – in this case, the magazines.
CA 2.6
(a) Some costs are recognized as expenses on the basis of a presumed direct association with
specific revenue. This presumed direct association has been identified both as “associating cause
and effect” and as “matching (expense recognition principle).”
Direct cause-and-effect relationships can seldom be conclusively demonstrated, but many costs
(b) Some costs are assigned as expenses to the current accounting period because
(1) their incurrence during the period provides no discernible future benefits;
(2) they are measures of assets recorded in previous periods from which no future benefits are
expected or can be discerned;
CA 2.6 (Continued)
(c) A cost should be capitalized, that is, recorded as an asset when it is expected that the asset will
produce benefits in future periods. The important concept here is that the incurrence of the cost
has resulted in the acquisition of an asset, a future service potential. If a cost is incurred that
resulted in the acquisition of an asset from which benefits are not expected beyond the current
(d) In the absence of a direct basis for associating asset cost with revenue and if the asset provides
benefits for two or more accounting periods, its cost should be allocated to these periods (as an
CA 2.7
(a) Costs should be recognized as expiring in a given period if they are not chargeable to a prior
period and are not applicable to future periods. Recognition in the current period is required when
any of the following conditions or criteria are present:
(1) A direct association of charges with revenue of the period, such as goods shipped to
CA 2.7 (Continued)
(b) (1) Although it is generally agreed that inventory costs should include all costs attributable to placing
(2) Cash discounts on purchases are treated as “other revenues” in some financial statements in
violation of the revenue and expense recognition principles. Revenue is not recognized when
goods are purchased or cash disbursed. Furthermore, inventories valued at gross invoice price
are recorded at an amount greater than their cash outlay resulting in a misstatement of
CA 2.8
(1) The alternative of expensing the costs of sample display houses in the period in which the
expenditure is made is based primarily upon the expense recognition principle. These costs
are of a promotional nature. Promotional costs often are considered expenses of the period in
which the expenditures occur due to the uncertainty in determining the time periods benefited
(do they meet the definition of an asset?). It is likely that no decision is made concerning the
(2) According to the expense recognition principle, the costs of service potentials should be
(b) There is uncertainty regarding the number of homes of a particular model which will be sold as a
result of the display sample. The success of this amortization method is dependent upon accurate
CA 2.8 (Continued)
(1) Cost amortization solely on the basis of time may be preferable when the life of the models can
(2) If all of the shell houses are to be sold at the same price, it may be appropriate to allocate the
costs of the display houses on the basis of the number of shell houses sold. This allocation
CA 2.9
Dear Uncle Carlos,
I received the information on Neville Corp. and appreciate your interest in sharing this venture with me.
However, I think that basing an investment decision on these financial statements would be unwise
because they are neither relevant nor representationally faithful.
CA 2.10
(a) The stakeholders are investors, creditors, etc.; i.e., users of financial statements, current, and future.
(b) Honesty and integrity of financial reporting, job protection, profit.
CA 2.11
1. Information about competitors might be useful for benchmarking the company’s results but if
management does not have expertise in providing the information, it could be highly subjective. In
addition, it is likely very costly for management to gather sufficiently verifiable information of this
nature.
2. While users of financial statements might benefit from receiving internal information, such as
5. Flexible reporting allows companies to “fine–tune” their financial reporting to meet the information
needs of its varied users. In this way, they can avoid the cost of providing information that is not
demanded by its users.
6. Similar to number 3, concerning forecasted financial statements, if managers report forward–
FINANCIAL REPORTING PROBLEM
From Note 1 – Summary of Significant Accounting Policies:
(a) Sales are recognized when revenue is realized or realizable and has
been earned. Revenue transactions represent sales of inventory.
606).
Trade promotions, consisting primarily of customer pricing
allowances, merchandising funds, and consumer coupons, are
(b) Historical Cost
Buildings, Machinery, and equipment.
(c) P&G will adopt the new revenue recognition standard on July 1, 2018
and the new lease standard on July 1, 2019.
(d) Accounting Policy Related to Advertising
COMPARATIVE ANALYSIS CASE
(a) Coca-Cola
Primary Lines of Business
Description of Business (Note 1)
1) The business of our Company is nonalcoholic beverages. Our
geographic operating segments (Europe, Middle East, and Africa;
Latin America; North America; and Asia Pacific) derive a majority of
their revenues from the manufacture and sale of beverage
concentrates and syrups and, in some cases, the sale of finished
PepsiCo
Our Divisions (Note 1)
Through our operations, authorized bottlers, contract manufacturers and
We are organized into six reportable segments (also referred to as
divisions), as follows:
1 Frito-Lay North America (FLNA), which includes our branded food and
snack businesses in the United States and Canada;
2) Quaker Foods North America (QFNA), which includes our cereal, rice,
pasta and other branded food businesses in the United States and
COMPARATIVE ANALYSIS CASE (Continued)
(b) Dominant Position – Beverage Sales: Coke or Pepsi
(c) Inventories, cost allocation method, the effect on comparability. As
indicated, the companies use essentially the same inventory valuation
method. Therefore, comparability is not affected.
Inventory
Inventories – Note 13. Inventories are valued at the lower of cost or net