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Exercise 2-7

Presented below are a number of operational guidelines and practices that have developed over time. Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices.

(a)		Fair value changes are not recognized in the accounting records.		Economic Entity AssumptionMaterialityFull Disclosure PrincipleMeasurement Principle (historical cost)Expense Recognition PrincipleMeasurement Principle (fair value)Revenue Recognition PrincipleExpense Recognition and Revenue Recognition PrinciplesPeriodicity Assumption
(b)		Financial information is presented so that investors will not be misled.		Expense Recognition and Revenue Recognition PrinciplesPeriodicity AssumptionRevenue Recognition PrincipleMeasurement Principle (historical cost)Full Disclosure PrincipleExpense Recognition PrincipleMaterialityMeasurement Principle (fair value)Economic Entity Assumption
(c)		Intangible assets are capitalized and amortized over periods benefited.		Measurement Principle (fair value)Full Disclosure PrincipleExpense Recognition and Revenue Recognition PrinciplesPeriodicity AssumptionMaterialityMeasurement Principle (historical cost)Revenue Recognition PrincipleExpense Recognition PrincipleEconomic Entity Assumption
(d)		Agricultural companies use fair value for purposes of valuing crops.		Economic Entity AssumptionPeriodicity AssumptionRevenue Recognition PrincipleExpense Recognition and Revenue Recognition PrinciplesMeasurement Principle (historical cost)Measurement Principle (fair value)Full Disclosure PrincipleExpense Recognition PrincipleMateriality
(e)		Each enterprise is kept as a unit distinct from its owner or owners.		MaterialityEconomic Entity AssumptionExpense Recognition and Revenue Recognition PrinciplesPeriodicity AssumptionExpense Recognition PrincipleMeasurement Principle (historical cost)Revenue Recognition PrincipleMeasurement Principle (fair value)Full Disclosure Principle
(f)		All significant post-balance-sheet events are reported.		Measurement Principle (historical cost)Periodicity AssumptionMaterialityExpense Recognition PrincipleRevenue Recognition PrincipleExpense Recognition and Revenue Recognition PrinciplesMeasurement Principle (fair value)Full Disclosure PrincipleEconomic Entity Assumption
(g)		Revenue is recorded at point of sale.		Expense Recognition and Revenue Recognition PrinciplesMeasurement Principle (historical cost)Full Disclosure PrincipleMaterialityPeriodicity AssumptionMeasurement Principle (fair value)Expense Recognition PrincipleEconomic Entity AssumptionRevenue Recognition Principle
(h)		All important aspects of bond indentures are presented in financial statements.		MaterialityPeriodicity AssumptionMeasurement Principle (historical cost)Full Disclosure PrincipleMeasurement Principle (fair value)Expense Recognition PrincipleEconomic Entity AssumptionRevenue Recognition PrincipleExpense Recognition and Revenue Recognition Principles
(i)		Rationale for accrual accounting.		Revenue Recognition PrincipleExpense Recognition and Revenue Recognition PrinciplesFull Disclosure PrincipleMeasurement Principle (fair value)Expense Recognition PrincipleMaterialityEconomic Entity AssumptionPeriodicity AssumptionMeasurement Principle (historical cost)
(j)		The use of consolidated statements is justified.		Revenue Recognition PrincipleExpense Recognition and Revenue Recognition PrinciplesExpense Recognition PrincipleEconomic Entity AssumptionPeriodicity AssumptionMeasurement Principle (historical cost)MaterialityFull Disclosure PrincipleMeasurement Principle (fair value)
(k)		Reporting must be done at defined time intervals.		Measurement Principle (historical cost)Expense Recognition and Revenue Recognition PrinciplesMeasurement Principle (fair value)Expense Recognition PrincipleEconomic Entity AssumptionFull Disclosure PrincipleRevenue Recognition PrinciplePeriodicity AssumptionMateriality
(l)		An allowance for doubtful accounts is established.		Full Disclosure PrincipleExpense Recognition PrincipleMeasurement Principle (fair value)Economic Entity AssumptionRevenue Recognition PrincipleMaterialityExpense Recognition and Revenue Recognition PrinciplesPeriodicity AssumptionMeasurement Principle (historical cost)
(m)		Goodwill is recorded only at time of purchase.		Expense Recognition PrincipleRevenue Recognition PrincipleMeasurement Principle (historical cost)Periodicity AssumptionExpense Recognition and Revenue Recognition PrinciplesFull Disclosure PrincipleMaterialityMeasurement Principle (fair value)Economic Entity Assumption
(n)		A company charges its sales commission costs to expense.		Measurement Principle (fair value)Economic Entity AssumptionExpense Recognition PrincipleRevenue Recognition PrincipleExpense Recognition and Revenue Recognition PrinciplesFull Disclosure PrinciplePeriodicity AssumptionMeasurement Principle (historical cost)Materiality

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