1) What do accountants assume about the life of the business? Why is this done?
It is assumed that the business will be ongoing, for example, that the business will have an indefinite life. Although not necessarily true, this allows accountants to distinguish between revenue and expenses earned and incurred in different reporting periods, allowing a more accurate profit figure, and to distinguish between assets, which have future economic benefits, and expenses that are totally consumed within one reporting period.
2) Explain the link between the going concern principle and the reporting period principle.
Going Concern principle allows businesses to distinguish between assets, which have future economic benefits in future reporting periods, and expenses which are totally consumed within the reporting period. Reporting period principle allows the allocation of expenses and revenue into the period in which they were incurred and earned, so that an accurate profit figure can be calculated for the period to evaluate the performance of the business on a regular basis.
3) The qualitative characteristic of relevance may be supported by an accounting principle. State the accounting principle and explain this link fully.
Relevance and Accounting Entity. Both require that business assets and personal assets considered separately, in order to evaluate the true performance of the business.
4) The owner of a small business has stated that cents may be omitted from all balance sheets. State the qualitative characteristic that may support his statement and explain why the business owner may be correct.
Relevance. The cents are not material as its omission will not affect decision making. Thus, its removal from the balance sheets make them only show information useful for decision making, leading to better decision making.
5) Can some1 explain to me what the going concern means? i dont really understand it.
Basically, all businesses are expected to live beyond the reporting period being reported. Otherwise, there is little point distinguishing between assets and expenses, since assets will not have "future economic benefits" if the business dies before these benefits can be utilised, making it the same as expenses, which are completely consumed within the reporting period. This is the primary importance of the principle.
Second usage is decision making, which makes budgeting useful as future reporting periods are expected to exist. This is more into Unit 4.
6) Exercise 1.1 page 13 in Box's book.
This is what I found:
The $120 000 should be reported as a liability item, as it represents a future obligation of economic sacrifice to the firm’s customers. A differing opinion is that this item may be viewed as revenue because there is an inflow of economic resources. However, the obligations of the business have not yet been fulfilled. As there is a future sacrifice to be made, it should be shown on the firm’s balance sheet as a liability at the end of 2010. In terms of accrual accounting, the revenue has not been earned and will not be earned until the magazines are provided to customers. The qualitative characteristic of relevance demands that revenue earned over a period of time be matched with expenses incurred over that same time period. As the cost of producing the magazines has not yet been incurred, the recognition of the revenue should be delayed until the future periods when it has been earned. At this time the firm’s obligations to customers will be fulfilled. Thus, the liability is eliminated and the revenue can then be recognised.
I hope my answers are of some help but please be aware that I did rush in my answers a little -- I wouldnt really write my theory answers like this on the exam, it's only a framework of how it should look like.
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