BUS FPX 2061 Assessment 4 Accounting Theory and Merchandising Accounting

BUS FPX 2061 Assessment 4 Accounting Theory and Merchandising Accounting

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Capella University

BUS-FPX2061 Accounting Fundamentals

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Assessment 4: Accounting Theory and Merchandising Accounting

1. Discuss the Effects of All Five Major Accounting Assumptions on the Accounting Process

The five major accounting assumptions are business entity, going concern, money measurement, stable dollar, and periodicity.

The business entity assumption states that each business has a separate existence from its owners, creditors, or investors. Financial statements are therefore prepared for the entity alone, showing only its own financial activities and obligations.

The going concern assumption presumes that an entity will continue operating indefinitely unless evidence suggests otherwise. This supports using historical cost rather than liquidation or market values for recording assets. If liquidation is imminent, this assumption no longer applies.

The money measurement assumption implies that only transactions measurable in monetary terms are recorded. The use of a stable currency such as the dollar allows comparability of financial statements.

The stable dollar assumption presumes that the value of the dollar remains relatively stable over time. Although inflation affects purchasing power, accountants do not adjust financial statements for these changes, potentially leading to issues such as inaccurate depreciation.

Finally, the periodicity assumption divides a company’s life into accounting periods—usually months or years—to allow reporting and comparison of performance over time.

2. Describe All Five Concepts’ Impact on the Accounting Process

The five major accounting concepts influencing the accounting process are general-purpose financial statements, substance over form, consistency, double entry, and articulation.

General-purpose financial statements are prepared periodically to meet the needs of external users and management. These reports offer standardized financial information for decision-making.

The concept of substance over form requires that transactions be recorded based on their economic reality rather than their legal form. For example, a three-year lease that transfers ownership is recorded as a purchase and recognized as an asset, not as a rental expense.

Consistency ensures the same accounting methods and principles are used over time to maintain comparability and reliability. Arbitrary changes to methods are not allowed.

Double entry mandates that every transaction affects at least two accounts, with total debits equaling total credits, ensuring balance in the accounting equation.

Lastly, articulation refers to the interrelationship between financial statements. For instance, net income from the income statement affects retained earnings, which in turn impacts the balance sheet.

3. Generally Accepted Accounting Principles (GAAP): Five Major Accounting Principles

The five major principles of GAAP are exchange-price, revenue recognition, matching, gain and loss recognition, and full disclosure.

The exchange-price principle dictates that transactions are recorded at the agreed exchange price at the time of occurrence. This establishes what is recorded, when it is recorded, and at what amount.

The revenue recognition principle states that revenue should be recorded when it is earned and realized, typically upon the sale of goods or services—not when cash is received.

The matching principle requires expenses to be recognized in the same period as the revenues they help generate. For example, the cost of goods sold is recorded in the same period as the sale of those goods.

According to the gain and loss recognition principle, gains are recorded when realized, whereas losses are recognized as soon as they are evident—reflecting the concept of conservatism.

Finally, the full disclosure principle requires that all information relevant to financial statement users’ decisions be disclosed, either in the statements, notes, or supplementary reports.

4. Identify the Three Modifying Conventions and Their Impact

The three major modifying conventions are cost-benefit, materiality, and conservatism.

The cost-benefit convention considers whether the benefit of providing certain information outweighs its preparation cost. This ensures efficiency in reporting.

Materiality allows accountants to handle insignificant items in a simplified, though theoretically inaccurate, manner if doing so would not affect users’ decisions.

Conservatism emphasizes prudence by ensuring assets and income are not overstated, protecting investors and creditors from misleading financial representations.

Ethically, accountants must apply these conventions responsibly, maintaining integrity and objectivity in financial reporting.

5. Identify the Principles, Assumptions, or Concepts Used to Justify Accounting Procedures

The following table links accounting procedures to their respective accounting principles, assumptions, or concepts:

No.	Accounting Procedure	Justifying Principle/Concept
1	Inventory is recorded at the lower of cost or market value.	Conservatism (B)
2	A truck purchased in January was reported at 80% of cost despite a market value drop to 70%.	Stable Dollar Assumption (I)
3	Collection of $90,000 for future services recorded as a current liability.	Revenue Recognition (C)
4	President’s salary expensed even though most work relates to future years.	Matching and Period Cost (G)(F)
5	No entry made for a $1,000,000 offer on land carried at $756,000.	Realization Principle (H)
6	Printed stationery valued at $25,500 treated as current asset at year-end.	Conservatism / Materiality
7	Land acquired for $295,000 recorded at cost despite a higher appraisal of $401,000.	Exchange-Price Principle (E)
8	Payment of $8,565 rent to the company’s sole shareholder recorded as expense.	Business Entity and Matching (A)(F)

6. Supply the Missing Terms in Each Equation

Equation	Complete Formula
Net sales = Gross sales – (Sales discounts + Sales returns and allowances)
Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory
Gross margin = Net sales – Cost of goods sold
Income from operations = Gross margin – Operating expenses
Net income = Income from operations + Nonoperating revenues – Nonoperating expenses

7. Identify and Describe the Two Methods Used to Determine Merchandise Inventory

Accountants use perpetual and periodic inventory procedures to determine merchandise inventory.

The perpetual inventory system continuously updates inventory records with each purchase and sale. Supermarkets and retail stores using barcode scanners employ this method, as it provides real-time tracking and accurate inventory levels. It is especially suitable for businesses dealing in high-value items such as cars or appliances.

In contrast, the periodic inventory system updates inventory only after a physical count, typically at the end of a reporting period. It is used by companies dealing with low-cost items—such as office supplies, small hardware, or seasonal goods—where maintaining continuous records is impractical.

References

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate accounting (18th ed.). Wiley.

Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2021). Financial accounting (5th ed.). McGraw-Hill Education.

BUS FPX 2061 Assessment 4 Accounting Theory and Merchandising Accounting

Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2020). Introduction to financial accounting (12th ed.). Pearson.