Choice "a" is correct. Recognition.

According to the FASB's conceptual framework, the process of reporting an item in the financial

statements of an entity is recognition.

Choice "b" is correct. Comprehensive income is the change in equity of a business during a period

from transactions and other events and circumstances from non-owner sources. It includes all

changes in equity except those resulting from investments by owners and distributions to owners.

SFAC 6 para 70.

Choice "c" is correct. 1990 ($25,000) $125,000

1991 -- 180,000

Because these are comparative financial statements, prior period adjustments require retroactive

treatment for the years presented. Because 1989 is not presented, the 1989 correction is shown as a

prior period adjustment of $25,000 to retained earnings statement of 1990.

Net income before adjustments

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Rule: Unrealized losses (or gains) resulting from changes in market value of available-for-sale

investments should be reported as a component of other comprehensive income in shareholders'

equity.

Unrealized gains and losses on investments held for trading would be included in net income.

Correction of errors of prior periods should be reported as an adjustment to beginning retained

earnings, not as an item of net income.

Choice "d" is correct. $87,000.

Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale

would cause earnings to differ from comprehensive income for an enterprise in an industry not

having specialized accounting principles.

Rule: FAC 5 defines "earnings" for a period to exclude certain cumulative accounting adjustments and

other non-owner changes in equity (such as changes in market value of marketable securities

available for sale) that are included in comprehensive income for a period.

Choice "b" is correct. One-fifth of the cabinet costs (depreciation expense) should be included in

selling, general, and administrative expenses for 1991.

Choice "a" is incorrect. Merchandise display cabinets in stores relate to selling activities, not to the

purchase cost of goods sold.

Choices "c" and "d" are incorrect. Merchandise display cabinets are fixed assets whose cost should be

allocated systematically over their five-year useful life.

Choice "a" is correct. $260,000.

General and administrative

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"Freight-in" is part of "cost of goods sold."

"Freight-out" is a "selling" expense.

Sales representative salaries is a selling expense.

Choice "a" is correct, as of January 1, 1992, the beginning of the year.

Rule: The cumulative effect of a change in accounting principle equals the difference between

retained earnings at the beginning of period of the change and what retained earnings would have

been if the change was applied to all affected prior periods, assuming comparative financial

statements are not presented. If comparative statements are presented, then beginning retained

earnings of the earliest year presented is adjusted for the cumulative effect of the change. We are

assuming, based on the answer options given, that Harvey is not presenting comparative financial

statements.

Choice "b" is incorrect. The cumulative effect of the change is not determined as of the date the

decision is made.

Choices "c" and "d" are incorrect. The cumulative effect of the change is not determined by a

weighted average.

Choice "c" is correct. Interim financial reporting should be viewed as reporting for an integral part of

an annual period.

Choices "a", "b", and "d" are incorrect, per the above rule.

Choice "a" is correct. $5,000 operating profit for Segment C.

Rule: Operating profit by segments is based on the measure of profit reported to the "Chief

Operating Decision Maker."

Interest expense, income taxes, and general corporate expenses are not allocated to the divisions

solely for the purposes of segment disclosures; they may be allocated if that is how the segments

report to the "Chief Operating Decision Maker."

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