E211HO Ass guidelines used umptions Principles and Constrain

E2-11HO (Ass guidelines used umptions, Principles, and Constraints) A number of operational by accountants are described below. 1. The treasurer of Doug Flutie Co. wishes to prepare financial statements only during downturns in their wine production, which occur periodically when the rhubarb crop fails. He states that it is at such times that the statements could be most easily prepared. In no event would more than 30 months pass without statements being prepared 2. The Chicago Power &Light; Company has purchased a large amount of property, plant, and equipment over a number of years. They have decided that because the general price level has changed materially over the years, they will issue only price-level adjusted financial statements. Robert Smith Manufacturing Co. decided to manufacture its own widgets because it would be cheaper to do so than to buy them from an outside supplier. In an attempt to make their statements more comparable with those of their competitors, Robert Smith charged its inventory account for what they felt the widgets would have cost if they had been purchased from an outside supplier. (Do not use the revenue recognition principle.) Flanagan\'s Discount Centers buys its merchandise by the truck and train- carload. Flanagan does not defer any transportation costs in computing the cost of its ending inventory. Such costs, although varying from period to period, are always material in amount. 4. Gab& Run, Inc., a fast food company, sells franchises for $100,000, accepting a $5,000 down payment and a 50-year note for the remainder. Grab & Run promises for 3 years to assist in site selection, building, and management training. Grab& Run records the $100,000 franchise fee as revenue in the period in which the contract is signed. 5. Curtis Conway Company \"faces possible expropriation (i.e., takeover) of foreign facilities and possible losses on sums owed by various customers on the verge of bankruptcy.\" The company president has decided that these possibilities should not be noted on the financial statements because Conway still hopes that these events will not take place. Mike Singletary, manager of College Bookstore, Inc, bought a computer for his own use. He paid for the computer by writing a check on the bookstore checking account and charged the \"Office Equipment\" account. 7.

Solution

1. Periodicity

In this assumption the life of entity is divided into periodical interval like one calender year for which financial statement are prepared.

2. Materiality

This constraint deals with disclosure of financial transaction in statement which are material in size.

3. Consistency

Following the method of valuation of inventory or asset regularly from one period to another.

4. Conservatism

Financial statements are prepared keeping in mind the downward measurement criteria. Like closing stock is valued at cost or net realizable value which ever is lower.