By: Mulualem/AcFn/CoBE/BDU

Do it! Chapter One

1. Identifies the qualitative characteristics that make accounting information useful. Presented
below are a number of questions related to these qualitative characteristics and underlying
constraints. (Do not use relevance or faithful representation.)
a) AB Corp. switches from FIFO to average-cost and then back to FIFO over a 2-year period.
Which qualitative characteristic of accounting information is not followed?
b) Assume that the profession permits the savings and loan industry to defer losses on investments
it sells, because immediate recognition of the loss may have adverse economic consequences
on the industry. Which qualitative characteristic of accounting information is not followed?
c) W & R Inc. does not issue its first-quarter report until after the second quarter’s results are
reported. Which qualitative characteristic of accounting is not followed?
d) Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line
basis. Which qualitative characteristic of accounting information may not be present?
e) Nadal Company has attempted to determine the replacement cost of its inventory. Three
different appraisers arrive at substantially different amounts for this value. The president,
nevertheless, decides to report the middle value for external reporting purposes. Which
qualitative characteristic of information is lacking in these data?
2. M2 plc has hired you to review its accounting records prior to the closing of the revenue and
expense accounts as of December 31, the end of the current fiscal year. The following
information comes to your attention. State whether you agree with the decisions made by M 2
plc. Support your answers with reference, whenever possible, to the conceptual framework of
financial reporting.
a) During the current year, M2 plc changed its policy in regard to expensing purchases of small
tools. In the past, it had expensed these purchases because they amounted to less than 2% of
net income. Now, the president has decided that the company should follow a policy of
capitalization and subsequent depreciation. It is expected that purchases of small tools will not
fluctuate greatly from year to year.
b) The company constructed a warehouse at a cost of Br. 1,000,000. It had been depreciating the
asset on a straight-line basis over 10 years. In the current year, the controller doubled
depreciation expense because the replacement cost of the warehouse had increased
significantly.
c) When the statement of financial position was prepared, the preparer omitted detailed
information as to the amount of cash on deposit in each of several banks. Only the total
amount of cash under a caption “Cash in banks” was presented.
d) On July 15 of the current year, M2 plc purchased an undeveloped tract of land at a cost of Br.
320,000. The company spent Br. 80,000 in subdividing the land and getting it ready for sale.
An appraisal of the property at the end of the year indicated that the land was now worth Br.
500,000. Although none of the lots were sold, the company recognized revenue of Br.
180,000, less related expenses of Br. 80,000, for a net income on the project of Br. 100,000.
e) For a number of years, the company used the FIFO method for inventory valuation purposes.
During the current year, the president noted that all the other companies in the industry had
switched to the average-cost method. The company decided not to switch to average-cost
because net income would decrease Br. 830,000.
1|Page
Course Title: Intermediate Financial Accounting I
 By: Mulualem/AcFn/CoBE/BDU
Answer Key: Do it! Chapter One
1.
a) Consistency
b) Neutrality
c) Timeliness
d) Comparability
e) Verifiability
2.
a) From the facts, it is difficult to determine whether to agree or disagree. Consistency, of course,
is violated in this situation although its violation may not be material. Furthermore, the change
of accounting policies regarding the treatment of small tools cannot be judged good or bad but
would depend on the circumstances. In this case, it seems that the result will be approximately
the same whether the company capitalizes and expenses, or simply expenses each period, since
the purchases are fairly uniform. Perhaps from a cost standpoint (expediency), it might be best
to continue the present policy rather than become involved in detailed depreciation schedules,
assuming that purchases remain fairly uniform. On the other hand, the president may believe
there is a significant unrecorded asset that should be shown on the statement of financial
position. If such is the case, capitalization and subsequent depreciation would be more
appropriate.
b) Disagree. At the present time, accountants do not recognize price level or current value
adjustments in the accounts. Hence, unless the controller is proposing use of revaluation
accounting for all warehouses, it is misleading to deviate from the historical cost principle
because conjecture or opinion can take place. Also, depreciation is not so much a matter of
valuation as it is a means of cost allocation. Assets are not depreciated on the basis of a decline in
their fair value. Rather, they are depreciated on the basis of a systematic charge of expired cost
against revenues.
c) Agree. The full disclosure principle recognizes that reasonable condensation and summarization
of the details of a company’s operations and financial position are essential to readability and
comprehension. Thus, in determining what full disclosure is, the accountant must decide
whether omission will mislead readers of the financial statements. Generally, companies present
only the total amount of cash on a statement of financial position unless some special
circumstance is involved (such as a possible restriction on the use of the cash). In most cases,
however, the company’s presentation would be considered appropriate and in accordance with
the full disclosure principle.
d) Disagree. The historical cost principle indicates that companies account for assets and liabilities
on the basis of cost. If sales value were selected, for example, it would be extremely difficult to
establish an appraisal value for the given item without selling it. Note, too, that the revenue
recognition principle provides guidance on when revenue should be recognized. Revenue
should be recognized when the performance obligation is satisfied. In this case, the revenue was
not recognized because the critical event for satisfying the performance obligation, “sale of the
land with transfer to the buyer,” had not occurred.
e) From the facts, it is difficult to determine whether to agree or disagree with the president. The
president’s approach is not a violation of any principle. Consistency requires that accounting
entities give accountable events the same accounting treatment from period to period for a
given business enterprise. It says nothing concerning consistency of accounting principles among
business enterprises. From a comparability viewpoint, it might be useful to report the
information on an average-cost basis. But, as indicated above, there is no requirement to do so.
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Course Title: Intermediate Financial Accounting I
 By: Mulualem/AcFn/CoBE/BDU
Do it! Chapter Two
1. The following trial balance of NV Inc. does not balance.
NV Inc.
Trial Balance
June 30, 2022
Debit Credit
Cash Br. 2,870
Accounts Receivable Br. 3,231
Supplies 800
Equipment 3,800
Accounts Payable 2,666
Unearned Service Revenue 1,200
Share Capital—Ordinary 6,000
Retained Earnings 3,000
Service Revenue 2,380
Salaries and Wages Expense 3,400
Office Expense 940
Br. 13,371 Br. 16,916
Each of the listed accounts should have a normal balance per the general ledger. An examination of the
ledger and journal reveals the following errors.
1. Cash received from a customer on account was debited for Br. 370, and Accounts Receivable was
credited for the same amount. The actual collection was for Br. 730.
2. The purchase of a computer printer on account for Br. 500 was recorded as a debit to Supplies for
Br. 500 and a credit to Accounts Payable for Br. 500.
3. Services were performed on account for a client for Br. 890. Accounts Receivable was debited for
Br. 890 and Service Revenue was credited for Br. 89.
4. A payment of Br. 65 for telephone charges was recorded as a debit to Office Expense for Br. 65 and
a debit to Cash for Br. 65.
5. When the Unearned Service Revenue account was reviewed, it was found that service revenue
amounting to Br. 225 was performed prior to June 30.
6. A debit posting to Salaries and Wages Expense of Br. 670 was omitted.
7. A payment on account for Br. 206 was credited to Cash for Br. 206 and credited to Accounts
Payable for Br. 260.
8. A dividend of Br. 575 was debited to Salaries and Wages Expense for Br. 575 and credited to Cash
for Br. 575.
Instructions: prepare a correct trial balance. (Note: It may be necessary to add one or more accounts
to the trial balance.)
2. On January 1, 2022, Norma Smith and Grant Wood formed a computer sales and service company
in Manchester, U.K., by investing Br.90,000 cash. The new company, Lakeland Sales and Service,
has the following transactions during January.
a. Pays Br.6,000 in advance for 3 months’ rent of office, showroom, and repair space.
b. Purchases 40 personal computers at a cost of Br.1,500 each, 6 graphics computers at a cost of
Br.2,500 each, and 25 printers at a cost of Br.300 each, paying cash upon delivery.
c. Sales, repair, and office employees earn Br.12,600 in salaries and wages during January, of
which Br.3,000 was still payable at the end of January.

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Course Title: Intermediate Financial Accounting I
 By: Mulualem/AcFn/CoBE/BDU
d. Sells 30 personal computers at Br.2,550 each, 4 graphics computers for Br.3,600 each, and 15
printers for Br.500 each; Br.75,000 is received in cash in January, and Br.23,400 is sold on a
deferred payment basis.
e. Other operating expenses of Br.8,400 are incurred and paid for during January; Br.2,000 of
incurred expenses are payable at January 31.
Instructions
a. Using the transaction data above, prepare for the month of January (1) a cash-basis income
statement, and (2) an accrual-basis income statement.
b. Using the transaction data above, prepare as of January 31, 2022, (1) a cash-basis statement of
financial position and (2) an accrual-basis statement of financial position.
c. Identify the items in the cash-basis financial statements that make cash-basis accounting
inconsistent with the theory underlying the elements of financial statements.

Solution
1.
NV Inc.
Trial Balance
June 30, 2022
Debit Credit
Cash (Br. 2,870 + Br. 360 - Br. 130) Br. 3 ,100
Accounts Receivable (Br. 3,231 - Br. 360) 2,871
Supplies (Br. 800 – Br. 500) 300
Equipment (Br. 3,800 + Br. 500) 4,300
Accounts Payable (Br. 2,666 - Br. 260 - Br. 206) Br. 2,200
Unearned Service Revenue (Br. 1200 – Br. 225) 975
Share Capital—Ordinary 6,000
Dividends 575
Retained Earnings 3,000
Service Revenue (Br. 2,380 + Br. 225 + Br. 801) 3,406
Salaries and Wages Expense (Br. 3,400 + Br. 670 – Br. 575) 3,495
Office Expense 940
Br. 15,581 Br. 15,581

4
Course Title: Intermediate Financial Accounting I
 By: Mulualem/AcFn/CoBE/BDU
2. a
Lakeland Sales and Service
Income statement
For the month ended January 31, 2022
Cash basis accounting Accrual basis accounting
Revenue 75,000 98,400
Expenses:
Cost of computers & printers 82,500 59,500
Rent 6,000 2,000
Salaries & Wages 9,600 12,600
Other Operating expense 8,400 10,400
Total expenses 106,500 84,500
Net income (loss) (31,500) 13,900
b.
Lakeland Sales and Service
Statements of Financial Position
January 31, 2022
Cash basis accounting Accrual basis accounting
Assets:
Prepaid rent Br. 4,000
Inventory 23,000
Accounts Receivable 23,400
Cash Br. 58,500 58,500
Total Assets Br. 58,500 Br. 108,900
Equity and Liabilities
Equity Br. 58,500 103,900
Salaries & Wages payable 3,000
Accounts payable 2,000
Total Equity and Liabilities Br. 58,500 Br. 108,900
c. Do it!

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Course Title: Intermediate Financial Accounting I