The four underlying assumptions of generally accepted accounting principles are economic entity, monetary unit, periodicity, and going concern. Consider the following independent situations.1. Mound Builders Groceries has over 1,000 grocery stores throughout the North- west. Approximately 200,000 customers visit its stores each day. Because of the continual nature of grocery sales, the company does not publish an income statement. The company feels that it has an indefinite life and a periodic report would mislead investors. 2. Trolls Shipping provides delivery of packages between the United States and Japan. During the current year, the company delivered 3,000 packages for its U.S. customers totaling $25,000 in revenue. For its Japanese customers, the company delivered 1,000 packages totaling ¥1,000,000 (yen). The company’s income statement indicates that total revenue equals 4,000 packages delivered with no corresponding amount in the income statement. 3. Slugs Typewriter has provided some of the finest typewriters in town for the past 50 years. Because of the advance of electronic word processors and computers, customer demand has dwindled over the years to almost nothing in the current year and the company can no longer pay its debts. For the most recent year, the company reports its assets in the balance sheet at historical (original) cost. 4. Blue Hose Carpet specializes in the installation of carpet and wood flooring. The company has the usual business expenses: salaries, supplies, utilities, advertising, and taxes. John Brewer, the company’s owner, took his wife and two daughters to Disney World. John reported the airfare and hotel expenses in the income statement of Blue Hose Carpet. 5. 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.
6. 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 on the balance sheet of Gorloks Tax Services.
7. 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.
8. 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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