Home Assignment 1

Question 1
Do the terms financial reporting and financial statements mean the same thing? Explain.

Question 2
Is externally reported financial information always precise and accurate?

Question 3
Why is the balance sheet a logical place to begin a discussion of financial statements?

Question 4
Why is a going concern assumption an important consideration in understanding financial statements?

Question 5
Explain the effect of operating profitability on the balance sheet of a business entity. Does it necessarily
enhance the size of balance sheet?

Question 6
Does net income represent supply of cash that could be distributed to shareholders in the form of
dividend? Explain.

Question 7
When do accountants consider revenue to be realized? What basic question about recording revenue in
accounting records is answered by the realization principle?

Question 8
Listed here are three common business situations involving revenue. At what point the business should
recognize revenue?
1. Airline ticket revenue
2. Magazine Subscription revenue
3. Prepaid Telephone Card revenue

Question 9
Listed below are four items that may or may not require disclosure in the notes that accompany
financial statements.
a. MC Ltd uses percentage of completion method to recognize revenue on long term construction
contracts. This is one of the two acceptable methods of accounting for such projects. Over the
life of the project, both methods produce the same result; but annual results may differ
substantially.
b. One of the important employees is leaving the company and going to work for a competitor.
 c. Shortly after the balance sheet date, but before the financial statements are issued, one the two
food processing plants was damaged in an earthquake. The plant will be out of service for at
least three months.
d. The management of Software Systems believes that the company has developed systems
software that make Windows virtually obsolete. If they are correct, the company’s profits could
increase by 10 fold or more.
For each case, explain what, if any, disclosure is required by the company in its financial statements.

Question 10
Assume you have the opportunity to purchase some shares in OV Auto Ltd from a member of the
company. The member suggests that the company’s profitability is really stronger that closing numbers
indicate because advertising expense should have been capitalized. The member argues that the Rs.
13.9 million advertising cost will generate future revenues and showing it as an asset would have met
the requirements of matching principle. How would you respond?