Examples of some operational guidelines used by accountants follow.
1. The treasurer of Sweet Grapes Corp. would like to prepare financial statements only during downturns in the company's wine production, which occur periodically when the grape crop fails. He states that it is at such times that the statements could be most easily prepared. The company would never allow more than 3 0 months to pass without statements being prepared.
2. Tower Manufacturing Ltd. decided to manufacture its own widgets because it would be cheaper than buying them from an outside supplier. In an attempt to make its statements more comparable with those of its competitors,
Tower charged its inventory account for what it felt the widgets would have cost if they had been purchased from an outside supplier. (Do not use the revenue recognition principle.)
3. Cargo Discount Centres buys its merchandise by the truckload and train carload. Cargo does not include any transportation costs in calculating the cost of its ending inventory. Such costs, although they vary from period to period, are always material in amount.
4. Quick & Healthy, a fast-food company, sells franchises for $!00,000, accepting a $5,000 down payment and a 25- year note for the remainder. Quick & Healthy promises for three years to assist in site selection, building, and management training. Quick & Healthy records the full $! 00,000 franchise fee as revenue when the contract is signed.
5. Mustafa Corp. faces a possible government expropriation (i.e., takeover) of its foreign facilities and possible losses on sun1s that are owed by various customers who are almost bankrupt. The company president has decided that these possibilities should not be noted on the financial statements because Mustafa still hopes that these events will not take place.
6. Maurice Morris, owner of Rare Bookstore, Inc., bought a computer for his own use. He paid for the computer by writing a cheque on the bookstore chequing account and charged the Office Equipment account.
7. Brock Inc. decides that it will be selling its subsidiary, Breck Inc., in a few years. Brock has excluded Breck's activities from its consolidated financial results.
8. 'Wilhelm Corporation expensed the purchase of new manufacturing equipment.
9. A large lawsuit has been filed against Mahoney Corp. Mahoney has recorded a loss and related estimated liability that is equal to the maximum possible amount that it feels it might lose. Mahoney is confident, however, that either it will win the suit or it will owe a much smaller amount.
Instructions
(a) Discuss the usefulness of a conceptual framework.
(b) For each of the situations above, list the foundational principle or qualitative characteristic of financial information that has been violated.