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g. Zero Corporation is being sued for $1,000,000 for breach of contract. Its lawyers believe that the
damages will be minimal. Zero reports the possible loss in a note.
Q 1-5. A corporation like General Motors has many owners (stockholders). Which concept enables the accountant
to account for transactions of General Motors, separate and distinct from the personal transactions of the
owners of General Motors?
Q 1-6. Zebra Company has incurred substantial financial losses in recent years. Because of its financial condi-
tion, the ability of the company to keep operating is in question. Management prepares a set of finan-
cial statements that conform to generally accepted accounting principles. Comment on the use of
GAAP under these conditions.
Q 1-7. Because of assumptions and estimates that go into the preparation of financial statements, the statements
are inaccurate and are, therefore, not a very meaningful tool to determine the profits or losses of an entity
or the financial position of an entity. Comment.
Q 1-8. The only accurate way to account for the success or failure of an entity is to accumulate all transactions
from the opening of business until the business eventually liquidates. Comment on whether this is true.
Discuss the necessity of having completely accurate statements.
Q 1-9. Describe the following terms, which indicate the period of time included in the financial statements:
b. Calendar year
c. Fiscal year
Q 1-10. Which standard of measure is the best for measuring financial transactions?
Q 1-11. Countries have had problems with the stability of their money. Briefly describe the problem caused for
financial statements when money does not hold a stable value.
Q 1-12. In some countries where inflation has been material, an effort has been made to retain the significance of
money as a measuring unit by adjusting the financial statements by an inflation factor. Can an accurate
adjustment for inflation be made to the statements? Can a reasonable adjustment to the statements be
made? Discuss.
Q 1-13. An arbitrary write-off of inventory can be justified under the conservatism concept. Is this statement true or
false? Discuss.
Q 1-14. Inventory that has a market value below the historical cost should be written down in order to recognize a
loss. Comment.
Q 1-15. There are other acceptable methods of recognizing revenue when the point of sale is not acceptable. List
and discuss the other methods reviewed in this chapter, and indicate when they can be used.
Q 1-16. The matching concept involves the determination of when to recognize the costs associated with the reve-
nue that is being recognized. For some costs, such as administrative costs, the matching concept is difficult
to apply. Comment on when it is difficult to apply the matching concept. What do accountants often do
under these circumstances?
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Chapter 1 Introduction to Financial Reporting 23
Q 1-17.
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Balance Sheet, The American, Generally Accepted Accounting Principles, Financial Accounting Standards Board
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