BUS FPX 2061 Assessment 4 Accounting Theory and Merchandising Accounting

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

1. Discuss the Effects of All Five Major Accounting Assumptions on the Accounting Process

The five major accounting assumptions are business entity, going concern, money measurement, stable dollar, and periodicity.

The business entity assumption maintains that a business is separate from its owners, investors, and creditors. This ensures that financial statements reflect only the company’s financial activities and obligations, preventing confusion between business and personal assets.

The going concern assumption suggests that a business will continue operating indefinitely unless there is evidence of liquidation. This allows accountants to use historical cost instead of market value, ensuring stability in financial reporting. If a company is no longer a going concern, liquidation values replace historical costs.

The money measurement assumption emphasizes that only measurable financial transactions—expressed in monetary units—are recorded. This provides consistency in evaluating and comparing financial data across reporting periods.

The stable dollar assumption assumes that the currency maintains consistent purchasing power over time. Although inflation can distort asset values, this assumption simplifies reporting by avoiding constant adjustments to the changing value of money.

Finally, the periodicity assumption divides a business’s life into uniform reporting intervals (monthly, quarterly, or annually). This enables accurate performance comparisons across time periods and timely financial decision-making.

2. Describe All Five Concepts’ Impact on the Accounting Process

The five core accounting concepts include general-purpose financial statements, substance over form, consistency, double-entry, and articulation.

General-purpose financial statements are created periodically to serve the informational needs of external stakeholders and upper management. These statements help assess a company’s financial health and decision-making efficiency.

The substance over form concept requires accountants to record transactions based on their economic substance rather than their legal form. For example, if a company leases a vehicle with the intent to own it after the lease term, the transaction is recorded as a purchase rather than a lease, reflecting its true economic impact.

Consistency ensures that a company uses the same accounting principles over time, enhancing comparability and reliability in financial statements. Arbitrary changes in accounting methods are discouraged to preserve accuracy.

Under the double-entry system, every transaction affects at least two accounts, maintaining the balance of total debits and credits. This forms the foundation of accurate financial reporting.

Lastly, articulation refers to the interdependence of financial statements. For example, net income from the income statement flows into retained earnings, which in turn connects to the equity section of the balance sheet.

3. Generally Accepted Accounting Principles (GAAP) and the Five Major Accounting Principles

The five major accounting principles are the exchange-price principle, revenue recognition principle, matching principle, gain and loss recognition principle, and full disclosure principle.

Principle	Description and Effect on Accounting Process
Exchange-Price Principle	Transactions are recorded at the agreed exchange price between parties. It defines what, when, and how amounts are recorded.
Revenue Recognition Principle	Revenue is recognized when it is earned and realizable, ensuring income is recorded in the correct period.
Matching Principle	Expenses are recognized in the same period as the revenues they help generate, linking costs to income.
Gain and Loss Recognition Principle	Gains are recognized when realized, but losses are recognized as soon as they are foreseeable, aligning with the conservatism principle.
Full Disclosure Principle	All relevant information that could affect users’ decisions must be disclosed in financial statements or their accompanying notes.

4. Identify the Three Modifying Conventions and Their Impact on the Accounting Process

The three modifying conventions are cost-benefit, materiality, and conservatism.

The cost-benefit convention evaluates whether the value of providing additional information justifies the associated cost. Accountants must weigh the usefulness of data against the expense of obtaining it.

Materiality allows minor deviations from theoretical accuracy when the difference would not influence users’ decisions. Accountants assess whether an omission or misstatement would alter stakeholder judgment before deeming an item material or immaterial.

The conservatism convention promotes prudence by preventing overstatement of assets or income. This protects users from unrealistic expectations and supports ethical reporting.

Ethical Responsibility: Accountants must apply these conventions fairly and consistently, ensuring that any deviation from strict accounting principles does not mislead stakeholders or distort financial integrity.

5. Identify Principles, Assumptions, or Concepts Used to Justify Accounting Procedures

Accounting Procedure	Justifying Principle(s), Assumption(s), or Concept(s)
1. Inventory is recorded at the lower of cost or market value.	Conservatism (B)
2. A truck purchased in January reported at 80% of cost even though market value is 70%.	Stable Dollar Assumption (I)
3. Collection of $90,000 for next year’s services recorded as a liability.	Revenue Recognition (C)
4. President’s salary expensed during the year despite future focus.	Matching (F), Period Cost (G)
5. Offer for land at $1,000,000 not recorded as gain.	Realization Principle (C)
6. Stationery valued at $25,500 kept as a current asset.	Business Entity / Materiality
7. Land acquired for $295,000 recorded at cost, despite higher appraisal.	Exchange-Price Principle (E)
8. Rent paid to the owner’s truck expensed properly.	Business Entity (A), Matching (F)

6. Complete the Following Accounting Equations

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. Identify and Describe the Two Basic Methods for Determining Merchandise Inventory

The two primary methods for determining merchandise inventory are the perpetual inventory method and the periodic inventory method.

The perpetual inventory method continuously updates inventory records to reflect real-time stock levels. It is commonly used in supermarkets and large retail chains where barcode scanners automatically deduct sold items from inventory. This system also benefits businesses dealing with high-value products such as vehicles or appliances, ensuring precise inventory control.

Conversely, the periodic inventory method updates inventory only after a physical count at the end of an accounting period. This approach is suitable for businesses handling low-cost, high-volume items like stationery, nuts, or small household goods. Because each sale is not individually tracked, adjustments are made periodically before preparing financial statements.

References

Horngren, C. T., Harrison, W. T., & Oliver, M. S. (2021). Accounting (12th ed.). Pearson Education.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate Accounting (18th ed.). Wiley.

BUS FPX 2061 Assessment 4 Accounting Theory and Merchandising Accounting

Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2022). Financial Accounting (6th ed.). McGraw-Hill Education.