Nikki Okuma is going over the transactions for May. She is having fun running South Seas and is eager to learn more about the accounting aspects of her business

Review the following transactions and explain to Nikki the accounting rules that apply to each situation.

1. South Seas imports items from several Pacific island countries. All of them have different currencies.
2. South Seas imported $10,000 worth of inventory in May and sold $3,000 of it in May.
3. Three customers paid $400 in advance deposits for some carvings to be ordered from Tahiti.
4. Nikki has a personal collection of Balinese puppets which is displayed in her store.

1. The monetary-unit assumption requires that all of the financial statements should be reported in U.S. dollars.
2. The matching principle requires that items sold in May be recognized as cost of goods sold in May.
3. The revenue-recognition principle applies to accrual accounting. South Seas cannot recognize revenue even though customers have paid $400 in cash. The money will not be earned until the carvings are delivered.
4. Nikki cannot include her personal collection of Balinese puppets as part of the assets of the business. The separate-entity assumption requires that personal assets be kept separate from business assets.