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Answer to FA Test Paper FA No 4 |
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Test On Accounting Concept & Regulatory Framework |
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IDENTIFICATION OF THE VIOLATION OF THE FOLLOWING BASIC ACCOUNTING |
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(1) |
Historical Cost |
Company A reported its fixed assets on its balance sheet at fair market value |
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(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 |
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(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. |
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(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 |
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(5) |
Business Entity/ Economic Entity Assumption |
Company A includes the personal assets of its principal shareholders. |
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