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Chapter 1: Q6RQ. (page 32)

Explain the purpose of Generally Accepted Accounting Principles (GAAP), including the organization currently responsible for the creation and governance of these standards

Short Answer

Expert verified

GAAP is created and governed by the FASB. The purpose of GAAP is to assist in financial reporting and create acceptable accounting practices.

Step by step solution

01

Explanation of FASB

Financial Accounting Standards Board (FASB) is the organization in the U.S. responsible for creating and monitoring the Generally Accepted Accounting Principles (GAAP).

02

Explanation of GAAP

GAAP is the leading book for the rule of accounting in the U.S. It exhibits the conceptual framework of the objectives, characteristics, and elements of the financial statements issued by businesses. It provides a detailed process or rule for presenting the information in the financial report, which is globally accepted.

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Most popular questions from this chapter

Let’s examine a case using Greg’s Tunes and Sal’s Silly Songs. It is now the end of the first year of operations, and the stockholders want to know how well each business came out at the end of the year. Neither business kept complete accounting records, and no dividends were paid. The businesses throw together the data shown on the next page at year-end: \( 23,000 8,000 35,000 22,000 \) 10,000 6,000 44,000 9,000 Total Assets Common Stock Total Revenues Total Expenses Greg’s Tunes: Sal’s Silly Songs: Total Liabilities Common Stock Total Expenses Net Income To gain information for evaluating the businesses, the stockholders ask you several questions. For each answer, you must show your work to convince the stockholders that you know what you are talking about.

Requirements 2. Which business owes more to creditors?

Presented here are the accounts of Pembroke Bookkeeping Company for the year ended December 31, 2018: Land \( 10,000 Common Stock \) 29,000 Notes Payable 31,000 Accounts Payable 7,000 Property Tax Expense 3,100 Accounts Receivable 1,200 Dividends 28,000 Advertising Expense 12,000 Rent Expense 7,000 Building 147,400 Salaries Expense 64,000 Cash 2,800 Salaries Payable 800 Equipment 15,000 Service Revenue 192,000 Insurance Expense 1,700 Office Supplies 12,000 Interest Expense 6,600 Retained Earnings, Dec. 31, 2017 51,000 Requirements 1. Prepare Pembroke Bookkeeping Company’s income statement. 2. Prepare the statement of retained earnings. 3. Prepare the balance sheet

Tiny Town Kennel earns service revenue by caring for the pets of customers. Tiny

Town Kennel is organized as a corporation. During the past month, Tiny Town

Kennel has the following transactions:

a. Received \(520 cash for service revenue earned.

b. Paid \)325 cash for salaries expense.

c. Received a \(1,000 contribution in exchange for common stock.

d. Earned \)640 for service revenue, but the customer has not paid Tiny Town

Kennel yet.

e. Received utility bill of \(85, which will be paid next month.

f. Cash dividends of \)100 were paid to stockholders.

Indicate the effects of the business transactions on the accounting equation for Tiny

Town Kennel. Transaction (a) is answered as a guide.

Increase asset (Cash); Increase equity (Service Revenue)

During 2018, Flowing Rivers Spa reported revenue of \(30,000. Total expenses for the year were \)15,000. Flowing Rivers Spa ended the year with total assets of \(43,000, and it owed debts totaling \)14,000. At year-end 2017, the business reported total assets of \(28,000 and total liabilities of \)14,000. Requirements 1. Compute Flowing Rivers Spa’s net income for 2018. 2. Did Flowing Rivers Spa’s stockholders’ equity increase or decrease during 2018? By how much?

Annette Pachelo recently opened her own law office on March 1, which she operates as a corporation. The name of the new entity is Annette Pachelo, Attorney. Pachelo experienced the following events during the organizing phase of the new business and its first month of operation, March 2018. Some of the events were personal and did not affect the law practice. Others were business transactions and should be accounted for by the business. Mar. 1 Sold personal investment in Amazon stock, which she had owned for several years, receiving \(35,000 cash. 2 Deposited the \)35,000 cash from the sale of the Amazon stock in her personal bank account. 3 Deposited \(73,000 cash in a new business bank account titled Annette Pachelo, Attorney. The business issued common stock to Pachelo. 5 Paid \)700 cash for ink cartridges for the printer. 7 Purchased computer for the law office, agreeing to pay the account, \(5,000, within three months. 9 Received \)2,800 cash from customers for services rendered. 15 Received bill from The Lawyer for magazine subscription, \(400. (Use Miscellaneous Expense account.) 23 Finished court hearings on behalf of a client and submitted a bill for legal services, \)10,000, on account. 28 Paid bill from The Lawyer. 30 Paid utilities, \(1,200. 31 Received \)3,300 cash from clients billed on March 23. 31 Cash dividends of $5,500 were paid to stockholders. Requirements Prepare the following financial statements: a. Income statement.
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