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Case #4: Short answer questions - Accounting Concepts 1. (1) Describe the primary difference between cash basis and accrual basis accounting. (2) Identify the two primary principles/assumptions/constraints that allow for accrual basis accounting. 2. A common misconception of non-accountants is that accounting depreciation measures the deterioration in the value of an asset. (1) Identify the principle/assumption/constraint that necessitates the application of depreciation, (2) define it as completely as possible and (3) apply it by describing how the process of depreciation fits the definition. 3. A fellow staff auditor comments, "We don't need to make any record of that transaction because it does not amount to more than 5% of net assets. We can totally ignore it!" There are two misconceptions in this statement. (1) What principle/assumption/constraint is your colleague referring to? (2) Provide a short description of how he or she has misconstrued the concept. 4. Property, plant and equipment include all assets that a company uses in its long-term operations to produce profits on a yearly basis. These assets are recorded at historical cost on the balance sheet. A friend dismisses historical cost as meaningless and irrelevant to shareholders, suggesting that the asset's current price would be more meaningful if the company were forced to liquidate due to bankruptcy. Provide an accounting principle and an accounting assumption to counter your friend's argument.

Case #4: Short answer questions - Accounting Concepts 1. (1) Describe the primary difference between cash basis and accrual basis accounting. (2) Identify the two primary principles/assumptions/constraints that allow for accrual basis accounting. 2. A common misconception of non-accountants is that accounting depreciation measures the deterioration in the value of an asset. (1) Identify the principle/assumption/constraint that necessitates the application of depreciation, (2) define it as completely as possible and (3) apply it by describing how the process of depreciation fits the definition. 3. A fellow staff auditor comments, "We don't need to make any record of that transaction because it does not amount to more than 5% of net assets. We can totally ignore it!" There are two misconceptions in this statement. (1) What principle/assumption/constraint is your colleague referring to? (2) Provide a short description of how he or she has misconstrued the concept. 4. Property, plant and equipment include all assets that a company uses in its long-term operations to produce profits on a yearly basis. These assets are recorded at historical cost on the balance sheet. A friend dismisses historical cost as meaningless and irrelevant to shareholders, suggesting that the asset's current price would be more meaningful if the company were forced to liquidate due to bankruptcy. Provide an accounting principle and an accounting assumption to counter your friend's argument.

Auditing: A Risk Based-Approach (MindTap Course List)
Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Chapter11: Auditing Inventory, Goods And Services, And Accounts Payable: The Acquisition And Payment Cycle
Section: Chapter Questions
Problem 7CYBK
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Case #4: Short answer questions - Accounting Concepts 1. (1) Describe the primary difference between cash basis and accrual basis accounting. (2) Identify the two primary principles/assumptions/constraints that allow for accrual basis accounting. 2. A common misconception of non-accountants is that accounting depreciation measures the deterioration in the value of an asset. (1) Identify the principle/assumption/constraint that necessitates the application of depreciation, (2) define it as completely as possible and (3) apply it by describing how the process of depreciation fits the definition. 3. A fellow staff auditor comments, "We don't need to make any record of that transaction because it does not amount to more than 5% of net assets. We can totally ignore it!" There are two misconceptions in this statement. (1) What principle/assumption/constraint is your colleague referring to? (2) Provide a short description of how he or she has misconstrued the concept. 4. Property, plant and equipment include all assets that a company uses in its long-term operations to produce profits on a yearly basis. These assets are recorded at historical cost on the balance sheet. A friend dismisses historical cost as meaningless and irrelevant to shareholders, suggesting that the asset's current price would be more meaningful if the company were forced to liquidate due to bankruptcy. Provide an accounting principle and an accounting assumption to counter your friend's argument.
Transcribed Image Text:Case #4: Short answer questions - Accounting Concepts 1. (1) Describe the primary difference between cash basis and accrual basis accounting. (2) Identify the two primary principles/assumptions/constraints that allow for accrual basis accounting. 2. A common misconception of non-accountants is that accounting depreciation measures the deterioration in the value of an asset. (1) Identify the principle/assumption/constraint that necessitates the application of depreciation, (2) define it as completely as possible and (3) apply it by describing how the process of depreciation fits the definition. 3. A fellow staff auditor comments, "We don't need to make any record of that transaction because it does not amount to more than 5% of net assets. We can totally ignore it!" There are two misconceptions in this statement. (1) What principle/assumption/constraint is your colleague referring to? (2) Provide a short description of how he or she has misconstrued the concept. 4. Property, plant and equipment include all assets that a company uses in its long-term operations to produce profits on a yearly basis. These assets are recorded at historical cost on the balance sheet. A friend dismisses historical cost as meaningless and irrelevant to shareholders, suggesting that the asset's current price would be more meaningful if the company were forced to liquidate due to bankruptcy. Provide an accounting principle and an accounting assumption to counter your friend's argument.
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