Accounting Principles Flashcards
Financial statements should present all information needed by an informed reader to make an economic decision.
Full disclosure principle
increases in assets or the extinguishment of liabilities stemming from the delivery of goods or the provision of services. Measured as the cash equivalent amount of the good or service provided
Revenue
Recognize expenses only when expenditures help to produce revenues
Matching principle
Assets and liabilities are recorded at historical cost, that is, their cash equivalent amount at time of origination. This value is the market value of the item on the date of acquisition
Historical cost principle
Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels.
Capital maintenance
This value is used to approximate liquidation value or selling price. It is the net value to be received after the costs of sale are deducted from the current market value
a. Example: Lower cost or market for inventory valuation
Net realizable value
This value represents how much you would have to pay to replace an asset. Current replacement cost would represent current market value from the buyer’s perspective
Current replacement cost
It is the price that would be received to sell an asset (or the price to settle a liability) in an orderly transaction between market participants at the measurement date.
a. Example: is used to value trading and available-for-sale securities.
Current market value
This value is historical cost less the accumulated amortization or depreciation of the asset.
a. Example: Buildings and equipment are reported at historical cost less accumulated depreciation
Amortized cost
This is the value determined from discounting the expected future cash flows.
a. Example: The discounted future cash flows are used in many capital budgeting decisions.
Net present value
Revenues are recognized when they are realized.
Revenue Recognition Principle
a. Goods or services have been provided (seller performance is substantially complete);
b. Collectibility of cash is assured - revenue is realizable (buyer performance is complete or assured);
c. Expenses of providing goods and services can be determined. This criterion becomes important when service or production is provided over an extended period of time.
Realization occurs in the accounting period in which three conditions are met:
When uncertainty exists with respect to the ultimate collection of cash, several alternative methods of revenue recognition are available.
Two important methods are the installment method and the cost recovery method.
recognize expenses only when expenditures help to produce revenues. Revenues are recognized when earned and realized or realizable; the related expenses are recognized, and the revenues and expenses are “matched” to determine net income or loss.
matching principle
