2. 职称英语
  3. 1. You are auditing a business, May Company for 1999 and 2000. You discover that

1. You are auditing a business, May Company for 1999 and 2000. You discover that

游客2025-06-21  16
问题 1. You are auditing a business, May Company for 1999 and 2000. You discover that May Company has adopted the following treatment of certain items in the accounts.
—In 1999, inventory valuation method was FIFO, but in 2000 LIFO method has been used, as the prices is rising.
—Insurance expense from 1 July 2000 to 1 July 2001 has been absolutely recorded in the accounts for expenses incurred.
Required:
State the fundamental accounting concept which governs each of the above two treatments:
(a)inventory valuation method
(b)insurance expense
and discuss the effect which each treatment will have on the following financial ratios:
(i)net profit margin
(ii)return on capital employed
(iii)current ratio
(iv)quick (acid test)ratio
选项
答案 (a)Prudence concept
The change inventory method in the time of price rising consists with the prudence concept which states that an accountant will take the figure which will understate rather than overstate the profit.
(i)net profit margin understated
(ii)return on capital employed understated
(iii)current ratio understated
(iv)quick (acid test) ratio no impact
(b)Matching Concept
The matching concept states that, expenses should be recognized in the accounting period in which it is incurred in earning revenues. Such expenditure must be periodically recognized when it actually makes its contribution to revenue.
(i)net profit margin understated
(ii)return on capital employed understated
(iii)current ratio understated
(iv)quick (acid test) ratio understated
解析
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