BUS FPX 2061 Assessment 4 Accounting Theory and Merchandising Accounting

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BUS FPX 2061 Assessment 4 Accounting Theory and Merchandising Accounting

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Capella university

BUS-FPX2061 Accounting Fundamentals

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Date

Assessment 4: Accounting Theory and Merchandising Accounting

Respond to the following seven questions using grammatically correct language.

1. Discuss the effects of all five major accounting assumptions on the accounting process.

The five major accounting assumptions—business entity, going concern, money measurement, stable dollar, and periodicity—each significantly affect the accounting process.

The business entity assumption asserts that every business has an existence independent of its owners, investors, or creditors. As a result, financial statements are prepared for that specific entity alone, reporting only its resources, obligations, and activities.

The going-concern assumption presumes that an organization will continue operating indefinitely unless evidence suggests otherwise. This assumption supports the use of historical cost for asset valuation rather than market value. If liquidation becomes necessary, however, liquidation values replace the going-concern basis.

The money measurement assumption requires that only transactions measurable in monetary terms (e.g., dollars) are recorded. This provides a uniform unit of measure to report economic activities and allows for comparability across financial statements.

The stable dollar assumption presumes that the dollar maintains consistent purchasing power over time. Accountants, therefore, do not adjust for inflation when preparing financial statements, although this can create inaccuracies in long-term asset valuation such as depreciation.

Finally, the periodicity assumption divides a business’s continuous life into equal reporting intervals—such as months, quarters, or years—to provide timely and comparable information. This facilitates meaningful comparison between different periods.

2. Describe all five concepts’ impact on the accounting process.

The five accounting concepts—general-purpose financial statements, substance over form, consistency, double entry, and articulation—influence how financial information is recorded and presented.

General-purpose financial statements are prepared at regular intervals to satisfy the diverse information needs of external stakeholders and management.

The concept of substance over form ensures that transactions are recorded according to their real economic substance, rather than their legal form. For example, if a company leases an asset under terms that effectively transfer ownership, the transaction is recorded as a purchase, not as a lease expense.

Consistency requires that a company apply the same accounting principles and practices from one period to another, preventing arbitrary changes that could distort financial comparisons.

Double-entry accounting ensures that every transaction affects at least two accounts—debits and credits—keeping the accounting equation in balance.

Finally, articulation highlights the interrelationship among financial statements. For instance, net income from the income statement flows into retained earnings, which then connects to the balance sheet to maintain accounting equilibrium.

3. Generally Accepted Accounting Principles (GAAP) set forth standards or methods for presenting financial accounting information. Describe all five major accounting principles.

The five major accounting principles—exchange-price, revenue recognition, matching, gain and loss recognition, and full disclosure—guide how financial information is measured and disclosed.

The exchange-price principle records resources at the price agreed upon by parties during an exchange, defining what is entered into the system, when it is recorded, and at what amount.

Under the revenue recognition principle, revenue is recorded when it is both earned and realized. For example, revenue from sales is not recognized until a transaction has officially occurred.

The matching principle requires that expenses be recognized in the same period as the revenues they help generate. For instance, the cost of a product sold is matched against the revenue it produces.

The gain and loss recognition principle dictates that gains are recognized only when realized, while losses are recorded as soon as they become evident. This conservative approach ensures that financial statements are not overly optimistic.

Lastly, the full disclosure principle mandates that all information capable of influencing an informed user’s decision be disclosed. This can be done in the main statements, footnotes, or supplementary schedules depending on the information’s nature.

4. In certain instances, companies do not strictly apply accounting principles because of modifying conventions or constraints. Identify the three modifying conventions. Describe the impact of these three modifying conventions on the accounting process. What, if any, ethical responsibilities does an accountant have when applying the modifying conventions?

The three modifying conventions—cost-benefit, materiality, and conservatism—adjust how principles are applied in practice.

The cost-benefit convention requires accountants to assess whether the benefits of disclosing certain information outweigh the costs of collecting and presenting it.

The materiality convention allows immaterial items to be treated in a simplified manner, even if not theoretically accurate. Accountants must judge whether the presentation of such information would alter the decisions of informed users.

The conservatism convention calls for caution in reporting, ensuring that assets and income are not overstated. This prevents misleading stakeholders and promotes ethical financial reporting. Accountants have an ethical responsibility to apply these conventions objectively, ensuring fairness, transparency, and integrity in financial reporting.

5. Correctly state the letter or letters of the principles, assumptions, or concepts used to justify the accounting procedure followed for at least four of the accounting procedures.

Accounting Procedure	Justifying Principle, Assumption, or Concept
1. Inventory is recorded at the lower of cost or market value.	(B) Conservatism
2. A truck purchased in January was reported at 80% of its cost even though its market value at year-end was only 70% of cost.	(I) Stable dollar assumption
3. The collection of $90,000 of cash for services to be performed next year was reported as a current liability.	(C) Earning principle of revenue recognition
4. The president’s salary was treated as an expense of the year even though he planned for future operations.	(G)(F) Period cost and Matching principle
5. No entry was made for an offer of $1,000,000 for land recorded at $756,000.	(C) Realization principle
6. Supplies valued at $25,500 were treated as a current asset at year-end.	(E) Exchange-price principle
7. Land purchased for $295,000 was recorded at cost even though appraised at $401,000.	(E) Exchange-price principle
8. Rent of $8,565 paid to the owner-stockholder for truck use was expensed.	(A)(F) Business entity and Matching principle

6. In each of the following equations supply the missing term(s):

Equation	Missing Term(s)
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. As part of the calculation for cost of goods sold it is necessary to determine the value of goods on hand, termed merchandise inventory. Accountants use two basic methods for determining the amount of merchandise inventory. Identify the two methods. Then, describe the circumstances (including examples of users of each method) under which each method would be used.

The two methods for determining merchandise inventory are perpetual inventory and periodic inventory procedures.

Under the perpetual inventory procedure, the merchandise inventory account is updated continuously to reflect items on hand. This method is common in computerized systems, such as supermarkets, where each scanned product automatically reduces inventory levels. It is also suitable for high-value goods like vehicles or electronics, where real-time tracking is critical.

In contrast, the periodic inventory procedure updates inventory balances at specific intervals after a physical count. It is often used by businesses with low-value or high-volume items—such as stationery suppliers or small retailers—where continuous tracking is unnecessary or too costly.

References

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2021). Accounting: Tools for Business Decision Making (8th ed.). Wiley.

Financial Accounting Standards Board (FASB). (2023). Generally Accepted Accounting Principles (GAAP). https://www.fasb.org

BUS FPX 2061 Assessment 4 Accounting Theory and Merchandising Accounting

Wild, J. J., Shaw, K. W., & Chiappetta, B. (2020). Fundamental Accounting Principles (25th ed.). McGraw-Hill Education.

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