BUSI3403 - Unit 1 Exercise

Alex Kit
Chapter 1
BE1-2
1. Investors/Creditors may use financial statement information to assess a company
to see if they have any growth potential or how much risk is involved if they were
to invest in the company or if they were to loan money to the company.
2. Management may use financial statement information for making decisions for
allocating jobs (hiring or laying off), giving bonuses or salary increase depending
the companys performance, and assess how the company is doing in order to
sustain a good reputation. The decision making process is depending on financial
statement information.
3. Auditors use financial statement information to assess a companys information to
ensure their statements are correct and free of any fraud or error. Auditors can also
offer advice for improving financial reporting and internal controls to maximize a
companys performance and efficiency.
BE1-5
Information asymmetry results in an inefficient capital marketplace because the company
does not perfectly incorporate all information into the stock price. This is due to hidden
or insider information that is not publicized. Investors may discount share prices, may
require higher cost of capital, or may choose to not invest in the market.
Chapter 2
BE2-2
a)
b)
c)
d)
e)
f)
g)

Representational faithfulness - Freedom from material error

Relevance - Predictive value
Relevance Feedback/confirmatory value
Relevance Materiality
Representational faithfulness Neutrality
Representational faithfulness Completeness
Relevance Predictive value

E2-3
a)
b)
c)
d)
e)
f)
g)

#4 Matching
#8 Historical cost
#10 Full disclosure
#7 Going concern
#2 Control
#1 Economic entity
#5 Periodicity

h) #9 Fair value
i) #3 Revenue recognition/realization
j) #6 Monetary unit
E2-10
1. Historically, revenue would be recognized when the airline tickets are sold
because it would be measureable and probable. Revenue is considered unearned
revenue when the advance tickets are sold, and will become recognized as
revenue when the service is delivered, the day when the ticket will be used.
2. Historically, revenue would be recognized on the day the item was sold and
delivered to the customer as it would be measurable, and probable with the
contract. Also, because no money was collected, it would be a liability that would
be considered as revenue. At the end of the 1 year contract, when money will be
collected by the customer, that is when the company can recognized the
cash/credit collected as revenue. Even though the item was delivered to the
customer, revenue cannot be recognized because there was no form of payment
received. It would be unearned revenue.
3. Historically, revenue is recognized when the day tickets are sold in advanced, as it
was measureable and collected. Revenue is considered unearned when the
baseball tickets are sold in advanced, and will not be recognized as revenue until
April to October when the tickets are used (i.e. June tickets purchased before
April will be recognized as revenue in June when they are used).
4. Historically, the revenue would be recognized in August when the order was
placed and the payment was collected by the company. Revenue would be
recognized in September when the item is delivered to the customer, whether it
was paid in cash or credit by the customer, the customer is responsible for the
liability for the credit payment.