Appendix I
Review Exercise Solutions
389
Reliability
• A component of reliability is verifiability. Since several invoices did not match the cost amounts
listed in HRI’s accounting records, the reported costs are not verifiable.Therefore, total expenses
is not a reliable number in the company’s income statement.
Comparability
• Even though the company provided balance sheet amounts from the previous year, two different
currencies are used from one year to the next. One currency has consistently been stronger than
the other. Therefore, it is not straightforward to compare the financial information of HRI
through time.
Part 3
Which of the basic accounting principles and/or assumptions has HRI violated? Explain.
The Business Entity Assumption
• The HRI cash account includes the personal savings of some of the shareholders.This indicates
that the accounting for the business was not kept separate from the personal affairs of the
owners.
The Monetary Unit Assumption
• HRI has included values in two different currencies on its financial statements.
The Objectivity Principle
• The objectivity principle is closely linked to the reliability characteristic. Many invoices did
not match the cost amounts listed in HRI’s accounting records. Therefore, the accounting for
expenses was not done objectively.
Measurement
• Assets must be recorded at their historical cost. However, HRI has valued its purchases at fair
market value.
Consistency
• The method of depreciation is inconsistent from 2015 to 2016. Sometimes, an inconsistency
can be fully justified. However, HRI did not explain the reason or provide backup for changing
this particular accounting method.
Disclosure
• HRI did not disclose the justification for changing the depreciation method.
• HRI did not disclose the information related to changing the location of the headquarters and
the inconsistent measures of currency.
