The four underlying assumptions of generally accepted accounting principles are economic entity, monetary unit, periodicity, and going concern. Consider the following four independent situations.
1. Masterson provides music cassettes for the past 30 years. Because of the advance in electronic musical devices, customer demand has dwindled over the years to almost nothing in the current year and the company can no longer pay its debts. For the most recent year, the company reports its assets in the balance sheet at historical (original) cost.
2. Phillips Flooring specializes in the installation of wood flooring. The company has the usual business expenses: salaries, supplies, utilities, advertising, and taxes. Mr. Phillips took his wife and two sons to Six Flags. Mr. Phillips reported the airfare and hotel expenses in the income statement of Phillips Flooring.
3. Mama's Restaurant has over 200 stores throughout the Southeast. Approximately 100,000 customers visit its stores each day. Because of the continual nature of dining, the company does not publish an income statement. The company feels that it has an indefinite life and a periodic report would mislead investors.
4. Indian Packaging delivers packages between the United States and India. During the current year, the company delivered 2,000 packages for its American customers totaling $75,000 in revenue. For its Indian customers, the company delivered 1,000 packages totaling 1,500,000 Indian Rupee. The company's income statement indicates that total revenue equals 3,000 packages delivered with no corresponding amount in the income statement.
Required:
For each situation, indicate which of the underlying assumptions of GAAP is violated.