Identify the applicable accounting convention for each of the following business scenarios. More than one convention may apply to each scenario. Please explain your choices for each scenario.
Scenario 1: The Acme Company is undergoing a reorganization to improve its financial structure. As part of this process, the company is considering lowering its expense calculations to improve the bottom line net income.
Scenario 2: Regal Enterprises has purchased $45,000 worth new equipment for use in its manufacturing operations and would like to write off the cost of this equipment in just a couple of years, instead of the usual 10 years for this equipment type. The company’s president fears that the economic conditions in its industry will worsen and cause the company to sell the equipment sooner than expected.
Scenario 3: Bozrah Industries, a small independent retailer, wants to change its accounting system from cash-based to accrual-based, and is concerned about how this change will affect the recording of sales and expenses.
Scenario 4: Randolph, Inc., has experienced major turnover in its accounting department, and the new head of accounting has been going through the current records of transactions. A couple of those transactions appear problematic. The first contains an error of $10,000 that the previous accountant decided was not large enough to adjust before the financial statements were prepared. This error would understate income and make the company look more profitable than it actually is.
Scenario 5: The Morrison Company receives much of its revenue from those customers who buy or rent furniture and appliances on the installment plan. Because the company uses an accrual-based accounting system, revenue is recognized at the point of sale, even though cash comes in on a monthly basis from customers. Lately, the company’s accountant is questioning the use of the accrual basis for recognizing revenue, because several customers have defaulted on their contracts, causing problems in the accounting system.
Scenario 6: Charter Communications has recently found itself at the wrong end of multiple lawsuits for failure to provide necessary services according to their contractual obligations. Senior management does not want to disclose the potential liability of these lawsuits on its financial statements.
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