08. Assumptions, Accounting Principles

Question 1

How do we measure a revenue?

Answer 1

Revenue is measured as the cash equivalent amount of the good
or service provided.

Question 2

What are revenues?

Answer 2

Revenues are increases in assets or extinguishment of liabilities
stemming from delivery of goods or from providing services—the
main activities of the firm.

Question 3

What does the historical cost accounting

principle state?

Answer 3

Assets and liabilities are recorded at historical cost (i.e., that is,
their cash equivalent amount at time of origination). This value is
the market value of the item on the date of acquisition.

Question 4

When should a company recognize revenues?

Answer 4

Revenues are recognized when they are earned and collectibility is reasonably assured.

Question 5

What is the full disclosure principle?

Answer 5

Financial statements should present all information needed by
an informed reader to make an economic decision. This principle
is sometimes referred to as the adequate disclosure principle.

Question 6

What is the unit of measurement assumption?

Answer 6

Assets, liabilities, equities, revenues, expenses, gains, losses, and
cash flows are measured in terms of the monetary unit of the
country in which the business is operated.

Question 7

What is the entity assumption?

Answer 7

We assume there is a separate accounting entity for each

business organization.

Question 8

What is the time period assumption?

Answer 8

The indefinite life of a business is broken into smaller time
frames, typically a year, for evaluation purposes and reporting
purposes

Question 9

What is the matching principle?

Answer 9

Recognize expenses only when expenditures help to produce

revenues.

Question 10

What is the concept of capital maintenance?

Answer 10

Capital is said to be maintained when the firm has positive

earnings for the year, assuming no changes in price levels.

Question 11

What is the going-concern assumption?

Answer 11

In the absence of information to the contrary, a business is
assumed to have an indefinite life (i.e., that is, it will continue to
be a going concern).

Question 12

When does realization occur in the accounting

period?

Answer 12

When:
Goods or services have been provided.
Collectibility of cash is assured.
Expenses of providing goods and services can be
determined.