Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 1 The Role of Accounting in Business 39

Match each of the following statements with the appropriate accounting concept. Some concepts

may be used more than once, while others may not be used at all. Use the notations below to

indicate the appropriate accounting concept.

Accounting Concept Notation

Accounting period concept P

Adequate disclosure concept D

Business entity concept B

Cost concept C

Going concern concept G

Matching concept M

Objectivity concept O

Unit of measure concept U

Statements

1. This concept justifies recording only transactions that are expressed in dollars.


2. Material litigation involving the corporation is described in a footnote.


3. If this concept was ignored, the confidence of users in the financial statements could not
   be maintained.


4. Personal transactions of owners are kept separate from the business.


5. Changes in the use of accounting methods from one period to the next are described in
   the notes to the financial statements.


6. This concept supports relying on an independent actuary (statistician), rather than the
   chief operating officer of the corporation, to estimate a pension liability.


7. July utilities costs are reported as expenses along with the July revenues.


8. The changes in financial condition are reported for November.


9. Land worth $800,000 is reported at its original purchase price of $220,000.


10. Assume that a business will continue forever.

Bechler Sports sells hunting and fishing equipment and provides guided hunting and fishing

trips. Bechler Sports is owned and operated by Lefty Wisman, a well-known sports enthusi-

ast and hunter. Lefty’s wife, Betsy, owns and operates Eagle Boutique, a women’s clothing

store. Lefty and Betsy have established a trust fund to finance their children’s college educa-

tion. The trust fund is maintained by First Montana Bank in the name of the children, Jeff and

Steph.

For each of the following transactions, identify which of the entities listed should record the

transaction in its records.

Entities

B Bechler Sports

F First Montana Bank

E Eagle Boutique

X None of the above

1. Lefty paid a local doctor for his annual physical, which was required by the workmen’s
   compensation insurance policy carried by Bechler Sports.


2. Lefty received a cash advance from customers for a guided hunting trip.


3. Betsy purchased two dozen spring dresses from a Billings (MT) designer for a special
   spring sale.


4. Betsy deposited a $2,000 personal check in the trust fund at First Montana Bank.


5. Lefty paid for an advertisement in a hunters’ magazine.


6. Betsy purchased mutual fund shares as an investment for the children’s trust.


7. Lefty paid for dinner and a movie to celebrate their twentieth wedding anniversary.

Exercise 1-27

Accrual Accounting Concepts

Goal 4

Exercise 1-28

Business entity concept

Goal 5