Why financial statements are audited by a public accounting


Question 1

For each of the following situations, list one foundational principle or qualitative characteristic that is used in each of the following situations.

a. Husky Inc. includes the activities of its subsidiaries in its financial statements.

b. The CFO at Husky Inc. appreciates that financial information may be misrepresented or misinterpreted if all pertinent information is not included.

c. Husky Inc. annual financial statements are audited by a public accounting firm.

d. Husky Inc. prepares quarterly financial statements for its stakeholders.

e. Husky Inc. assesses its ability to continue to operate for the foreseeable future.

f. Husky Inc. allocates the cost of its property, plant and equipment over the period it expects to benefit from these assets.

g. Husky Inc. is being sued my one of its employees who got injured while working. The lawsuit has been disclosed in the financial statements.

h. Husky Inc. issues its quarterly financial reports within seven days after each quarter closes.

i. Husky Inc. records revenue when risks and rewards are passed to its customer.

j. Husky Inc. records the purchase of an intangible at its cash equivalent price

Question 2

John, the sole owner of a small accounting services company, has the following transactions during the month of January, its first month of operation. He named the company Premier Accounting Services Inc. John prepares financial statements on a monthly basis.

Part A: Prepare the journal entry for each transaction.

Jan 1


Invested $20,000 cash and a $5,000 computer in the business in exchange for common shares.

Jan 5

Purchased office supplies in the amount of $1,000. Husky Inc. paid cash and has a policy of initially recognizing office supplies in Supplies Inventory.

Jan 10

Performed accounting services for a customer and sent them an invoice in the amount of $2,500.

Jan 12

Hired an accounting assistant who started working on Jan 14.

Jan 15

Paid January and February's rent in the amount of $500 per month.

Jan 20

Customer paid invoice billed on January 10.

Jan 25

Paid $1,500 for a newspaper advertising campaign that will run from February to September inclusive.

Jan 25

Paid the accounting assistant $1,600 which is her bi-weekly pay.

Jan 31

Counted the office supplies and determined that $850 of supplies remained on hand.

Jan 31

The assistant had 4 unpaid days at the end of the month.

Jan 31

The computer will be amortized on a straight-line basis over 2 years. There is no residual value.

Part B: Post the above transactions to T accounts.

Part C: Prepare the pre-closing trial balance for January 31.

Part D: Prepare the required closing entries.

Part E: Prepare reversing entries on February 1.

Question 3

The following is information for Mary Inc. for the year ended December 31, 2012. The effective tax rate is 30%. Prepare a multi-step statement of comprehensive income for 2012.

Accounting & legal services




Commission expense


Cost of goods sold


Diluted earnings per share


Dividend revenue


Earnings per share






Interest revenue


Loss on sale of equipment


Office salaries


Rent expense (50% relates to Selling and 50% relates to General and Administrative)




Sales salaries


Unrealized loss on investments designated through OCI


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Finance Basics: Why financial statements are audited by a public accounting
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