1-5 Four Accounting Assumptions

Question 1

What are the four underlying assumptions in the development of accounting standards and in the financial reporting process?

Answer 1

Economic Entity Assumption
Going Concern Assumption
Monetary Unit Assumption
Periodicity Assumption

Question 2

Are the four underlying assumptions specifically referenced in the conceptual framework?

Answer 2

No, but they are generally accepted concepts that provide a foundation for development of accounting standards

Question 3

Economic Entity Assumption

Answer 3

Specific economic activities can be considered an identifiable accounting unit, separate and apart from its owners and from other entities

Question 4

Going Concern Assumption

Answer 4

The business entity is not expected to liquidate but to continue operations for the foreseeable future. It is expected to be in business for a period of time sufficient to cary out contemplated operations, contracts, and commitments.

Question 5

Monetary Unit Assumption

Answer 5

The results of a company’s economic activities are reported in the U.S. dollar, the standard monetary unit in the U.S. It is standard practice to ignore changes in the purchasing power of currency (such as inflation and deflation).

Question 6

Periodicity Assumption

Answer 6

Changes in a company’s financial position are reported over a series of distinct time periods such as months, quarters, and years. A company’s economic life is divided up into artificial periods for reporting periods.

Question 7

Fiscal Year

Answer 7

An annual time period that corresponds to a calendar year or another 12-month period such as a fiscal year ended January 31st.