9A FAR Handout 9A1 And 9A2 Flashcards
Economic Entity Assumption
Economic activity can be identified with a particular unit of
Accountability
However, you can define entity at higher level (parent)
or lower level (subsidiary)
4 basic assumptions
1 economic entity assumption
2 going concern assumption
3 monetary unit assumption
4 periodicity assumption
Going concern assumption
Business enterprise life is long
Going concern assumption does not apply if liquidation of
Business appears imminent
In the going concern assumption, the fair value of an asset is irrelevant if…
2) What is this another reason for?
We need the asset on business operations
2) this is reason to use historical cost instead of fair value
Monetary unit assumption
Money (the U.S. dollar) is common denominator for economic
Activity
Provides appropriate basis for accounting measurement and
analysis
Periodicity assumption
Economic activities of enterprise can be divided into artificial time
Periods
We report financial information periodically to apprise users of
Performance and economic status
4 basic principles of accounting
1 Historical Cost Principle
2 Revenue Recognition Principle
3 Matching Principle
4 Full Disclosure Principle
Historical Cost Principle
2) why?
GAAP requires that most assets and liabilities be accounted for
And reported on basis of acquisition price
2) Because it’s the most reliable valuation
Exceptions to historical cost principle being the best valuation in certain situations ?
2 examples
1 impairments
2 lower-cost-or-market
Revenue recognition principle
Revenue is generally recognized when:
1 realized or realizable
And
2 earned
Revenues are realizable when…
Assets received are readily convertible into cash or claims to
Cash
Revenue recognition principle:
Revenues are considered earned when the entity has…
Substantially accomplished what it must do to be entitled to
The benefits represented by revenues
Revenue Recognition Principle:
Recognition at time of sale provides…
A reasonable test
Revenue Recognition Principle:
Exceptions to recognition at time of sale 4
1 during production (% completion)
2 receipt of cash (installment sales, cost recovery)
3 multiple deliverable revenue arrangements
4 milestone method for R&D
Matching Principle
Expenses are matched to revenues whenever reasonable or
Practicable
Full Disclosure Principle
Accountants use their judgement in deciding what gets reported
on financial statements
If something doesn’t appear in financial statements, it may appear
In footnotes or supplementary info
Full disclosure principle:
The footnotes generally…
Amplify or explain the items in the main body of the statements
Full disclosure principle:
Supplementary info (compared to footnotes)
Contains other info that may be highly relevant, but less reliable
Full disclosure principle:
Segment reporting is a good example of…
Footnote disclosure
3 Constraints
1 Cost benefit relationship
2 materiality
3 conservatism
Cost benefit relationship
Information is expensive
The costs of providing the info must not outweigh the benefits
That can be derived from using it
Materiality
Item is material if it’s inclusion or omission would influence or
Change judgement of reasonable person
Conservatism
When in doubt, choose solution that will least likely overstate
Assets and income
What are the 4 main processes of the Accounting Cycle?
1 Transaction JEs
2 Adjusting JEs
3 Financial Statements
4 Closing JEs
Accounting Cycle: Transaction JEs (steps 1-3)
1 prepare transaction JEs and record them in journal
2 Post transaction JEs to general ledger
3 prepare unadjusted trial balance
How many steps are in the accounting cycle?
10
Accounting Cycle:
Adjusting JEs pertains to what numbered steps?
Steps 4-6
Accounting Cycle:
Step 4
Prepare adjusting JEs, record them in the journal
Accounting Cycle:
Step 4: accrual type adjusting JEs, what are the 2 entries needed?
1 adjusting JE first
2 cash JE second
Ex. For A/R, payables, other receivables
Accounting Cycle:
Step 4: deferral type adjusting JEs, what are the 2 entries needed?
1 cash JE first
2 adjusting JE second
Ex. For depreciation, prepaid expenses, unearned revenue
Adjusting entries do not…
Debit or credit cash
Accounting Cycle:
Step 5 for adjusting journal entries
Post adjusting journal entries in general ledger
Accounting Cycle:
Step 6 (adjusting journal entries)
Prepare adjusted trial balance
Accounting Cycle:
Step 7
Prepare financial statements and footnotes under GAAP
Accounting Cycle:
Steps 8-10 closing JEs
8 prepare closing JEs, record them in journal
9 post closing JEs to general ledger
10 prepare post closing trial balance
What is optional to prepare at the end of the accounting cycle?
Prepare reversing JEs, record them in journal and post them to
General ledger
