For each of the following, indicate the accounting concept or constraint that has been violated, if any:
1) The company currently records its accounting transactions and prepares
its financial reports manually. The cost of using a new computerized
accounting system to do these tasks is estimated at $25,000.
Annual savings are expected to be $10,000.
2)Inventory is reported at cost when market value is higher.
3)Paper clips expense appears on the income statement, at $10.
4)Bad debt expense is recorded in the period when the account receivable is written off.
5)Small tools are recorded as long-lived assets and depreciated.
ANS:
1)Materiality constraint
2)cost benefit constraint
3)expense recognition criteria
4)matching principle
5)neutral
are these correct?
Your answers are mostly correct, but there is one minor error. Here are the correct accounting concepts or constraints violated for each scenario:
1) The company currently records its accounting transactions and prepares its financial reports manually. The cost of using a new computerized accounting system to do these tasks is estimated at $25,000. Annual savings are expected to be $10,000.
The accounting concept that has been violated here is the cost benefit constraint. The cost of implementing the new computerized accounting system ($25,000) is not justifiable given the expected annual savings of $10,000. According to the cost benefit constraint, the benefits derived from implementing a new accounting system should outweigh the costs involved.
2) Inventory is reported at cost when the market value is higher.
The accounting concept that has been violated here is the conservatism concept. The conservatism concept suggests that when there is uncertainty about the value of assets, liabilities, or revenue, a conservative approach should be taken. In this case, reporting inventory at cost when the market value is higher is not conservative and may overstate the value of inventory.
3) Paper clips expense appears on the income statement at $10.
There is no violation of any accounting concept or constraint in this scenario. The paper clips expense is correctly recognized and reported on the income statement.
4) Bad debt expense is recorded in the period when the accounts receivable is written off.
The accounting concept that has been violated here is the matching principle. The matching principle requires that expenses be recognized in the same period as the revenue they help generate. Recording bad debt expense in the period when the accounts receivable is written off does not adhere to this principle. Instead, bad debt expense should be recognized in the period when the related sales revenue was recognized, using an estimate based on historical patterns.
5) Small tools are recorded as long-lived assets and depreciated.
There is no violation of any accounting concept or constraint in this scenario. Recording small tools as long-lived assets and depreciating them is consistent with accounting principles. Depreciation is the systematic allocation of the cost of a long-lived asset over its useful life, which matches the expense with the related period in which the asset is used.
So, the revised answer is:
1) Cost benefit constraint
2) Conservatism concept
3) No violation
4) Matching principle
5) No violation