In 2012, Mary Frances established a boutique wine store in Victoria. After operating for three years, Mary hired her brother, Fred, to help with her accounting. Fred produced the first set of financial statements. Mary's office is in her house, and so Fred included Mary's house as an asset and valued it at $800,000, its market value in 2015. Mary's accounts receivable balance is $50,000, but Mary thinks that some of those accounts are not collectible. Fred feels it is reasonable to leave the accounts receivable balance at $50,000 until Mary knows for certain which accounts are not collectible. Fred decides not to include any notes to the financial statements because he feels they reveal too much information.
Since Mary does not own the building in which the wine store is located, Fred feels it is appropriate to expense the $25,000 Mary spent in 2015 on leasehold improvements to the wine store.
1. In groups, discuss which of the conceptual framework elements Fred has violated and the cause of the violation.
2. Where possible, identify the action that Fred should take to produce financial statements in accordance with generally accepted accounting principles.