Approach and Explanation: Define or explain articulation before you read the answer selections Select

the answer that best fits your description. The FASB classifies the elements of financial statements into two distinct groups. The first group of three elements—assets, liabilities, and equity—describes amounts of resources and claims to resources at a moment in time. The other seven elements (comprehensive income and its components—revenues, expenses, gains, and losses—as well as investments by owners and distributions to owners) describe transactions, events, and circumstances that affect an enterprise during a period of time. The first class—assets, liabilities, and equity—is changed by elements of the second class and at any time is the cumulative result of all changes. This interaction is referred to as “articulation.” That is, key figures in one statement (e.g. balance sheet) correspond to or are influenced by amounts reported in another statement (e.g. income statement). (Solution = c.)

QUESTION

10. (L.O. 5) The calculation of comprehensive income includes which of the following? Operating Income Distributions to Owners

a. Yes Yes b. Yes No c. No Yes

d. No No

Approach and Explanation: Define comprehensive income before reading the answer selections. Then

answer “Yes” or “No” for the inclusion of each of the items in question (Operating Income and Distributions to Owners). Then look for the corresponding combination of “Yes” and “No” to select your answer. Comprehensive income is a change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Thus it includes net income and all of its components (such as revenues, expenses, gains, and losses) and subtotals of various components of net income (such as gross profit and operating income). (Solution = b.)

QUESTION

11. (L.O. 5) Which of the following is false with regard to the concept “comprehensive income”? a. It is more inclusive than the traditional notion of net income.

b. It includes net income and all other changes in equity exclusive of owners’ investments and distributions to owners.

c. It is an “element” in the FASB’s conceptual framework.

d. It excludes prior period adjustments (transactions that relate to previous periods, such as corrections of errors).

Explanation: Comprehensive income includes all changes in equity during a period except those

resulting from investments by owners and distributions to owners. Prior period adjustments (such as corrections of errors) are included under comprehensive income; they are excluded from the concept of net income (as it is currently applied in practice). (Solution = d.)

QUESTION

12. (L.O. 6) The assumption that an enterprise will remain in business indefinitely and will not liquidate in the near future is called the:

a. economic entity assumption. b. going concern assumption. c. monetary unit assumption. d. periodicity assumption.

Conceptual Framework For Financial Reporting 2-23 ____________________________________________________________________________ Approach and Explanation: Read the stem (while covering up the answer selections) and attempt to

complete the statement. Compare your attempt with the selections. Hopefully, you anticipated the correct answer. If your attempt does not match any of the selections given, take each selection and write down the key words in the definitions of the term. This process should lead you to the correct response.

Answer selection “b” is correct because the going concern assumption implies that an enterprise will continue in business and will not liquidate within the foreseeable future. Selection “a” is incorrect because the economic entity assumption indicates that the activities of an accounting entity should be kept separate and distinct from all other accounting entities. Selection “c” is incorrect because the monetary unit assumption indicates that all transactions and events can be measured in terms of a common denominator—units of money. Selection “d” is incorrect because the periodicity assumption indicates that the economic activities of an enterprise can be divided into equally spaced artificial time periods. (Solution = b.)

QUESTION

13. (L.O. 7) Pluto Magazine Company sells space to advertisers. The company requires an advertiser to pay for services one month before publication. Advertising revenue should be recognized when:

a. an advertiser places an order. b. a bill is sent to an advertiser. c. the related cash is received. d. the related ad is published.

Approach and Explanation: Read the last sentence of the stem. We want to know the point at which

revenue should be recognized. Write down what you know from the revenue recognition principle. Revenue is generally recognized when (1) realized or realizable, and (2) earned. Read the stem and think of how to apply the revenue recognition principle to the facts given. At the points when an order is placed and a bill is sent to an advertiser, revenue has neither been realized nor earned. At the point when the cash is received in advance of the publication, the revenue is realized but not earned. The revenue is earned when the related ad is published and, thus, should be recognized then. (Solution = d.)

QUESTION

14. (L.O. 7) The historical cost principle provides that:

a. items whose costs are insignificant compared to other amounts on the financial statements may be accounted for in the most expedient manner.

b. assets and equities be expressed in terms of a common denominator.

c. the recorded amount of an acquired item should be the fair market value of the item.

d. the expenses of generating revenue should be recognized in the same period that the related revenue is recognized.

Approach and Explanation: Briefly define the historical cost principle before you read the answer

selections. See Illustration 2-4. Answer selection “a” describes the materiality quality. Selection “b” describes the monetary unit assumption. Selection “d” relates to the expense recognition principle (matching principle). (Solution = c.)

QUESTION

15. (L.O. 7) If cash is received from a customer in the current period, but the related performance obligation is not satisfied until a future period, the related expenses of generating the revenue should not be recognized until that future period. This guideline is an application of the:

a. revenue recognition principle. b. full disclosure principle. c. matching principle. d. cost constraint.

2-24 Problem Solving Survival Guide for Intermediate Accounting, 15th Edition

____________________________________________________________________________