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Brief Exercises
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Cash flows during the first year of operations for the Harman-Kardon Consulting Company were as follows: Cash collected from customers, $340,000; Cash paid for rent, $40,000; Cash paid to employees for services rendered during the year, $120,000; Cash paid for utilities, $50,000.

In addition, you determine that customers owed the company $60,000 at the end of the year and no bad debts were anticipated. Also, the company owed the gas and electric company $2,000 at year-end, and the rent payment was for a two-year period. Calculate accrual net income for the year.

BE1-1
Accrual accounting

lLO2

Identify the issuing organization for each of the following types of pronouncements: (a) Financial Reporting Releases, (b) Industry Accounting Guides, and (c) Statements of Financial Accounting Standards.

BE1-2
Sources of GAAP

lLO3

For each of the following items, identify the appropriate financial statement element or elements: (1) probable future sacrifices of economic benefits; (2) probable future economic benefits owned by the company; (3) inflows of assets from ongoing, major activities; (4) decrease in equity from peripheral or incidental transactions.

BE1-3
Financial statement elements

lLO6, LO6, LO6

Listed below are several statements that relate to financial accounting and reporting. Identify the basic assumption, broad accounting principle, or pervasive constraint that applies to each statement.

  1. Sirius Satellite Radio Inc. files its annual and quarterly financial statements with the SEC.
  2. The president of Applebee’s International, Inc. travels on the corporate jet for business purposes only and does not use the jet for personal use.
  3. Jackson Manufacturing does not recognize revenue for unshipped merchandise even though the merchandise has been manufactured according to customer specifications.
  4. Lady Jane Cosmetics depreciates the cost of equipment over their useful lives.

BE1-4
Basic assumptions and principles

lLO6, LO6, LO6, LO7, LO8

Identify the basic assumption or broad accounting principle that was violated in each of the following situations.

  1. Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured.
  2. McCloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million.
  3. Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.

BE1-5
Basic assumptions and principles

lLO6, LO6, LO6, LO7, LO8

For each of the following situations, (1) indicate whether you agree or disagree with the financial reporting practice employed and (2) state the basic assumption, pervasive constraint, or accounting principle that is applied (if you agree), or violated (if you disagree).

  1. Winderl Corporation did not disclose that it was the defendant in a material lawsuit because the trial was still in progress.
  2. Alliant Semiconductor Corporation files quarterly and annual financial statements with the SEC.
  3. Reliant Pharmaceutical paid rent on its office building for the next two years and charged the entire expenditure to rent expense.
  4. Rockville Engineering records revenue only after products have been shipped, even though customers pay Rockville 50% of the sales price in advance.

BE1-6
Basic assumptions and principles

lLO6, LO6, LO6, LO7, LO8








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