Assumptions

Question 1

(1) Goods or services have been provided, (2) Collectability of cash is assured, (3) Expenses of providing goods and services can be determined.

Answer 1

Realization

Question 2

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.

Answer 2

Unit of measurement assumption

Question 3

Increases in assets or extinguishment of liabilities stemming from delivery of goods or from providing services – the main activities of the firm

Answer 3

Revenue

Question 4

In the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue

Answer 4

Going concern

Question 5

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

Answer 5

Time period assumption

Question 6

We assume there is a separate accounting entity for each business organization

Answer 6

Entity assumption

Question 7

Accounting Assumptions

Answer 7

Entity Assumption
Going Concern Assumption
Unit-of-Measure Assumption
Time Period Assumption

Question 8

Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels. When a firm has income, it has recognized revenue sufficient to replace all the resources used in generating that revenue (return of capital), and has resources left over in addition (income, which is return on capital). That income could be distributed as dividends without eroding the net assets (capital) existing at the beginning of the year. GAAP is based on the concept of “financial” capital maintenance. As long as dividends do not exceed earnings, and earnings is not negative, financial capital has been maintained.

Answer 8

Capital maintenance