Answer To Financial Accounting Question Paper FA No 4: Test on Accounting Concept & Regulatory Framework

September 5th, 2006 Comments off
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Answer to FA Test Paper FA No 4

Test On Accounting Concept & Regulatory Framework

IDENTIFICATION OF THE VIOLATION OF THE FOLLOWING BASIC ACCOUNTING

(1)

    Historical Cost

Company A reported its fixed assets on its balance sheet at fair market value

(2)

                   Matching Principle

Company A paid $20,000 insurance premium which relates for a period of two years period. It charged all this $20,000 out to the income statement as insurance expenses

(3)

Realization or Revenue Recognition principle

Company A recognizes revenue for $20,000 advance payment received from its customers. However, the customer’s order can only be shipped next month.

(4)

         Full Disclosure principle

Company A is involved in a major lawsuit where it has been sued for $100million relating to the infringement of its competitors patent. Company A felt that the suit is without merit and therefore does not disclosed its existence in its financial statements

(5)

Business Entity/ Economic Entity Assumption

Company A includes the personal assets of its principal shareholders.

 

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