Assumptions, Accounting Principles

Question 1

What are the major accounting assumptions?

Answer 1

• Entity Assumption- separate accounting entity for each business organization
• Going Concern Assumption- business assumed to have an indefinite life
• Unit of Measure Assumption- F/S elements measured using monetary unit of country in which business is operated, assumes consistent and little to no inflation/deflation
• Time Period Assumption- indefinite business life broken into smaller time frames for evaluation and reporting purposes

Question 2

GAAP is based on the concept of “financial” capital maintenance. What does this mean?

Answer 2

• As long as dividends do not exceed earnings, and earnings aren’t negative, financial capital has been maintained
• Doesn’t consider price level changes

Question 3

What is the alternative concept of “physical” capital maintenance?

Answer 3

• Earnings cannot be measured until firm has provided for physical capital used up during the period
• Requires consideration of price levels

Question 4

What are the major accounting principles?

Answer 4

• Measurement
• Revenue Recognition
• Expense Recognition (Matching Principle)
• Full Disclosure Principle

Question 5

What are the major methods of measurement?

Answer 5

• Historical cost
• Net realizable value
• Current replacement cost (entry price)
• Fair value (exit price)
• Amortized cost
• Net present value

Question 6

Are economic and legal entities equivalent?

Answer 6

-No