In each case that follows, qualitative characteristics and accounting conventions may have been violated.
1. Elite Manufacturing Company uses the cost method for computing the balance sheet amount of inventory unless the market value of the inventory is less than the cost, in which case the market value is used. At the end of the current year, the market value is $302,000 and the cost is $324,000. The company uses the $302,000 figure to compute the value of inventory because management believes it is the more cautious approach.
2. Livery Service Company has annual sales of $20,000,000. It follows the practice of recording any items costing less than $500 as expenses in the year purchased. During the current year, it purchased several chairs for the executive conference room at $490 each, including freight. Although the chairs were expected to last for at least ten years, they were recorded as an expense in accordance with company policy.
3. Stardust Company closed its books on October 31, 2013, before preparing its annual report. On November 3, 2013, a fire destroyed one of the company’s two factories. Although the company had fire insurance and would not suffer a loss on the building, it seemed likely that it would suffer a significant decrease in sales in 2014 because of the fire. It did not report the fire damage in its 2013 financial statements because the fire had not affected its operations during that year.
4. Primal Drug Company spends a substantial portion of its profits on research and development. The company had been reporting its $12,000,000 expenditure for research and development as a lump sum, but management recently decided to begin classifying the expenditures by project, even though its recordkeeping costs will increase.
5. During the current year, Ziegler Company changed from one generally accepted method of accounting for inventories to another method, without disclosing the change.
6. Due to pressing business issues, Judson Products is consistently behind schedule in preparing its financial statements.
7. Thomas Electronics is a complex global business whose financial statements use many technical terms not known by the typical investor.
8. Siro Company produces financial statements that are not helpful in assessing the company’s prospects in the future.

For each of these cases, identify the accounting concept that applies state whether or not the treatment is in accord with the concept, and briefly explain why.

  • CreatedMarch 26, 2014
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