Assumptions of Financial Reporting
In each of the following independent situations, an example is given involving one of the five traditional assumptions of the accounting model. For each situation, identify the assumption involved (briefly explain your answer).
1. A subsidiary of Parent Inc. was exhibiting poor earnings performance for the year. In an effort to increase the subsidiary’s reported earnings, Parent Inc. purchased products from the subsidiary at twice the normal markup.
2. When preparing the financial statements for Mac Neil & Sons, the accountant included certain personal assets of Mac Neil and his sons.
3. The operations of Uintah Savings & Loan are being evaluated by the federal government. During their investigations, government officials have determined that numerous loans made by top management were unwise and have seriously endangered the future existence of the savings and loan.
4. Pine Valley Ski Resort has experienced a Dr. astic reduction in revenues because of light snowfall for the year. Rather than produce financial statements at the end of the fiscal year, as is traditionally done, management has elected to wait until next year and present results for a two year period.
5. Colobri Inc. has equipment that was purchased in 1996 at a cost of $150,000. Because of inflation, that same equipment, if purchased today, would cost $225,000. Management would like to report the asset on the balance sheet at its current value.