Lopez Co. had three major business transactions during 2017.

(a) Reported at its fair value of $260,000 merchandise inventory with a cost of $208,000.

(b) The president of Lopez Co., Victor Lopez, purchased a truck for personal use and charged it to his expense account.

(c) Lopez Co. wanted to make its 2017 income look better, so it added 2 more weeks to its income statement reporting period (a 54-week year). Previous years were 52 weeks.

Instructions

In each situation, identify the assumption or principle that has been violated, if any, and discuss what the company should have done.

(a) Reported at its fair value of $260,000 merchandise inventory with a cost of $208,000.

Lower of Cost and Net realizable value concept is violated as the lower value if inventory is the cost value which should be reported on the financial statements.

(b) The president of Lopez Co., Victor Lopez, purchased a truck for personal use and charged it to his expense account.

It is the violation of separate entity concept, which means every entity business and owner is a separate entity and they are responsible for there own Income, expenses, assets and liabilities. Cost of Truck purchased by owner should not included in the Company's expenses.

(c) Lopez Co. wanted to make its 2017 income look better, so it added 2 more weeks to its income statement reporting period (a 54-week year). Previous years were 52 weeks.

Matching and Accrual, cutoff date and Matching concept is being violated in this event. Lopez Co. should report the revenue only earned in 2017 and Revenue of next year should be reported on the financial statements of 2018.