Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN: 9781337619455
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: Cengage Learning
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P1-6A The four underlying assumptions of generally accepted accounting principles are
economic entity, monetary unit, periodicity, and going concern. Consider the four independent
situations below.
1. Jumbo's is a local restaurant. Due to a bad shipment of potatoes, several of the company's
customers become ill, and the company receives considerable bad publicity. Revenues are
way down, several of its bills are past due, and the company is making plans to close the
restaurant at the end of the month. The company continues to report its assets in the balance
sheet at historical (original) cost.
2. Gorloks Tax Services is owned and operated by Sam Martin. The company has the usual
business assets: land, building, cash, equipment, and supplies. In addition, Sam decides to
buy a boat for him and his family to enjoy on the weekends. Sam includes the boat as an
asset in the balance sheet of Gorloks Tax Services.
3. Claim Jumpers International, a U.S.-based company, has operations in the United States
and in Europe. For the current year, the company purchased two trucks in the United States
for $10,000 and three trucks in Europe for €20,000 (euros). Because of the differences in
currencies, the company reported "Five Trucks" with no corresponding amount in the
balance sheet.
4. Cobbers Etc. sells specialty music equipment ranging from African bongo drums to grand
pianos. Because of the fluctuating nature of the business, management decides to publish
financial statements only when a substantial amount of activity has taken place. Its last set
of financial statements covered a period of 14 months, and the set of financial statements
before that covered a period of 18 months.
Required:
For each situation, indicate which of the underlying assumptions of GAAP is violated.
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