AIS 301 Ch. 2 Assumptions & Principles

Question 1

Economic entity

Answer 1

economic activity can be identified with particular unit of accountability

Question 2

Going concern

Answer 2

company will have a long life

Question 3

Monetary unit

Answer 3

money is appropriate basis for acct measurement & analysis; is relevant, simple, universally available, understandable & useful

Question 4

Periodicity

Answer 4

company can divide its economic activities into artificial time periods

Question 5

Historical cost principle

Answer 5

companies account for and report most assets and liabs on the basis of acquisition price. (free from error & neutral, it contributes to faithful representation)

Question 6

Fair value principle

Answer 6

GAAP based, price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 7

Revenue recognition principle

Answer 7

companies recognize revenue in acct period in which performance obligation is satisfied; recognition at time of sale provides a uniform & reasonable test

Question 8

Expense recognition principle

Answer 8

recognition of expenses is related to net changes in assets & earning revenues, that is, “let the expense follow the revenues”

Question 9

Full disclosure principle

Answer 9

recognizes nature & amount of info included in financial reports reflects series of judgmental trade-offs

Question 10

Cost constraint

Answer 10

costs of providing financial info be weighed against benefits that can be derived from using it; applies to informational requirements established by standard-setting bodies & gov agencies as well as to companies