(Attention: it is only for your preparation.

These exercises do not cover all the materials we have learned about)
E1-11 Basic assumptions, principles, and constraints
Listed below are the accounting concepts discussed in this chapter.
a. Economic entity assumption f. Recognition
b. Going concern assumption g. Matching principle
c. Periodicity assumption h. Presentation and disclosure
d. Monetary unit assumption i. Cost effectiveness
e. Historical cost principle j. Materiality
Identify by letter the accounting concept that relates to each statement or phrase below.
l. The process of incorporating information into the financial statements.
2. Information that could affect decision making should be reported.
3. Recognizing expenses in the period they were incurred to produce revenue.
4. The basis for measurement of many assets and liabilities.
5. Relates to the qualitative characteristic of timeliness.
6. All economic events can be identified with a particular entity.
7. The benefits of providing accounting information should exceed the cost of doing so.
8. Relates to an item's relative size, nature, and effects on decisions.
9. Assumes the entity will continue indefinitely.
10. Inflation causes a violation of this assumption.

E1-12 Multiple choice; basic assumptions, and principles

Determine the response that best completes the following statements or questions.
1.The primary objective of financial reporting is to provide information
a. About a firm's management team.
b. Useful to capital providers.
c. Concerning the changes in financial position resulting from the income-producing efforts of the
entity.
d. About a firm's financing and investing activities.

2. In general, revenue is recognized when

a. The sales price has been collected.
b. A purchase order has been received.
c. A good or service has been delivered to a customer.
d. A contract has been signed.

3. In depreciating the cost of an asset, accountants are most concerned with

a. Conservatism.
b. Revenue recognition.
c. Full disclosure.
d. Expense recognition.

4. The primary objective of the matching principle is to

a. Provide full disclosure.
b. Record expenses in the period that related revenues are recognized.
c. Provide timely information to decision makers.
d. Promote comparability between financial statements of different periods.

1
5. The separate entity assumption states that, in the absence of contrary evidence, all entities will
survive indefinitely.
a. True
b. False

E2-12 Financial statement disclosures

Parkman Sporting Goods is preparing its annual report for its financial year-end. The company’s controller
has asked for your help in determining how best to disclose information about the following items:
1. A related-party transaction.
2. Depreciation method.
3. Allowance for uncollectible accounts.
4. Composition of investments.
5. Composition of long-term debt.
6. Inventory costing method.
7. Number of ordinary shares authorized, issued, and outstanding.
8. Employee benefit plans.

Required:
Indicate whether the above items should be disclosed (A) in the summary of significant accounting policies
note, (B) in a separate disclosure note, or (C) on the face of the statement of financial position.

Exercise 3: multiple-step income statement

The following income statement items appeared on the adjusted trial balance of Foxworthy Corporation
for the year ended December 31, 2013 ($ in 000s): sales revenue, $22,300; cost of goods sold, $14,500;
selling expenses, $2,300; general and administrative expenses, $1,200; dividend revenue from
investments, $200; interest expense, $300.

Income taxes have not yet been accrued. The company's income tax rate is 40% on all items of income or
loss. These revenue and expense items appear in the company's income statement every year.

The company's controller, however, has asked for your help in determining the appropriate treatment of the
following transactions that also occurred during 2013 ($ in 000s). All transactions are material in amount.

1. Investments were sold during the year at a loss of $300.

2. One of the company's factories was closed during the year. Restructuring costs incurred were $2,000.
3. One of Foxworthy's manufacturing facilities located in a foreign country were damaged in an
earthquake. A loss of $800 was recognized.
4. During the year, Foxworthy completed the sale of one of its operating divisions that qualifies as a
component of the entity according to IFRS regarding discontinued operations. The division had
incurred operating income of $800 in 2013 prior to the sale, and its assets were sold at a loss of $1,800.

Required: Prepare Foxworthy’s statement of profit or loss for 2013, including basic earnings per share
disclosures. There are 2,000,000 ordinary shares outstanding throughout the year.
Exercise 1-11
Statement Assumption, Principle, Constraint
1. f. Recognition
2. h. Presentation and disclosure
3. g. Matching principle
4. e. Historical cost principle
5. c. Periodicity assumption
6. a. Economic entity assumption
7. i. Cost-effectiveness
8. j. Materiality
9. b. Going concern assumption
10. d. Monetary unit assumption

Exercise 1-12
1. b
2. c
3. d
4. b
5. b

Exercise 2-12
1. (B) in a separate disclosure note.
2. (A) in the summary of significant policies note.
3. (B) in a separate disclosure note, or (C) on the face of the statement of financial
position.
4. (B) in a separate disclosure note.
5. (B) in a separate disclosure note.
6. (A) in the summary of significant policies note.
7. (B) in a separate disclosure note.
8. (B) in a separate disclosure note, or (C) on the face of the statement of financial
position.
Answers to Exercise 3:

Foxworthy Manufacturing Corporation

Statement of Profit or Loss
For the Year Ended December 31, 2013
($ in 000s)
Sales revenue $22,300
Cost of goods sold 14,500
Gross profit 7,800
Operating expenses:
Selling $ 2,300
General and administrative 1,200
Restructuring costs 2,000
Total operating expenses 5,500
Operating income 2,300
Other income (expense)
Loss due to earthquake (800)
Loss on sale of investments (300)
Interest expense (300)
Dividend revenue 200
Other income (expense) (1,200)
Income from continuing operations before income taxes 1,100
Income tax expense 440
Income from continuing operations 660
Discontinued operations:
Income from operations of discontinued component (1,000)
(including loss on disposal of $1,800)
Income tax benefit 400
Loss on discontinued operations (600)
Net income $ 60
Basic earnings per share (in $):
Income from continuing operations $ 0.33
Discontinued operations $ (0.30)
Net income $ 0.03