TCO 7: The Assumption That Deals With When To Recognize The

1tco 7 The Assumption That Deals With When To Recognize The Costs A

1. (TCO 7) The assumption that deals with when to recognize the costs associated with the revenue recognized is (Points : 5) matching. going concern. consistency. materiality.

2. (TCO 7) The income statement summarizes (Points : 5) the profit for a specific period of time. the annual profit. the losses of the firm. the profit over six months.

3. (TCO 7) Which of the following is a false statement, as it relates to analysis? (Points : 5) If merchandise with a 20% markup is sold on credit, it would take ten successful sales of the same amount to make up for one sale not collected. Equity capital provides creditors with a cushion against loss. There is a difference between the objectives sought by short-term grantors of credit and those sought by long-term grantors of credit. The financial structure of the entity is of interest to creditors.

4. (TCO 7) Who is responsible for the preparation and the integrity of financial statements? (Points : 5) Cost accountant Auditor Management Public accountant

5. (TCO 7) Which of the following is not a type of audit opinion? (Points : 5) Unqualified opinion Qualified opinion Adverse opinion Clean opinion

Paper For Above instruction

The accounting principle concerning when to recognize costs in relation to revenue is fundamental to accurate financial reporting and is primarily governed by the matching principle. This principle stipulates that expenses should be recognized in the same period as the revenues they help to generate, thereby providing a more accurate picture of a company’s profitability (Gibson, 2021). The matching principle ensures that income statements reflect the true financial performance of an entity over a specific period, aligning costs with associated revenues.

In terms of the assumptions underlying this principle, the concept of the going concern is significant, as it presumes that a business will continue to operate into the foreseeable future, allowing costs and revenues to be matched over time. The consistency assumption supports this by advocating that financial statement policies are applied uniformly across periods, facilitating comparability. Materiality, however, plays a different role; it emphasizes that only significant costs or revenues that could influence the decisions of users need to be recognized, preventing the distortion of financial statements with immaterial items (Kieso, Weygandt, & Warfield, 2019).

Financial statements, especially the income statement, serve to summarize a company's financial performance over a specified period. They provide insights into profitability, detailing revenues earned and expenses incurred to arrive at net income or loss. This summary aids stakeholders in assessing operational efficiency and profitability, guiding investment and managerial decisions (Wild, Subramanyam, & Halsey, 2018).

Understanding the accuracy and reliability of financial statements involves recognizing the differences in analysis and the roles of various professionals. A false statement in analysis would be claiming that a certain markup guarantees sales or that equity capital solely provides a cushion for creditors. In reality, sales performance depends on multiple factors, and equity is both a source of capital and a buffer for losses, but it is not solely designed for creditor protection (Higgins, 2019).)

The responsibility for ensuring the integrity and preparation of financial statements traditionally rests with management. Management is liable for the accuracy and completeness of the financial reports, as they possess the best knowledge of the company's operations and internal controls. Auditors, whether internal or independent, provide an external review to ensure compliance with accounting standards but do not prepare the statements themselves (Carmichael, 2020).

Regarding audit opinions, they can be categorized mainly as unqualified (clean), qualified, adverse, or disclaimer. A clean opinion signifies that financial statements are free of material misstatements and fairly present the company's financial position. A qualified opinion indicates some issues but overall conformity with standards. An adverse opinion suggests significant misstatements, and a disclaimer signifies a lack of sufficient evidence to form an opinion (Arens, Elder, & Beasley, 2019). Importantly, "clean opinion" is not an official audit opinion term but rather a colloquial way to refer to an unqualified opinion.

In conclusion, recognizing costs appropriately in relation to revenue through the matching principle, understanding the scope of financial statement summaries, and acknowledging the roles and responsibilities regarding audits are fundamental components of financial reporting. Maintaining the integrity and transparency of financial information supports stakeholders’ confidence and ensures the utility of financial data for decision-making.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2019). Auditing and Assurance Services: An Integrated Approach. Pearson.
• Carmichael, D. R. (2020). Financial Statement Analysis and Security Valuation. Thomson South-Western.
• Gibson, C. H. (2021). Financial Reporting & Analysis. Cengage Learning.
• Higgins, R. C. (2019). Analysis for Financial Management. McGraw-Hill Education.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2018). Financial Statement Analysis. McGraw-Hill Education.