Assumptions, Accounting Principles

Question 1

4 Accounting Assumptions (“Entirely from your GUT”)

Answer 1

1. Entity
2. Going Concern
3. Unit of Measurement
4. Time period

Question 2

Entity Assumption

Answer 2

The entity is separate and distinct from its owners

Question 3

Going Concern Assumption

Answer 3

A business has an indefinite life that extends beyond the life of the owners

Question 4

Unit of Measurement Assumption

Answer 4

Everything is measured in terms of a stable monetary unit of measure; values are not adjusted for inflation

Question 5

Time Period Assumption

Answer 5

Indefinite life is broken into timeframes, such as a year, a quarter, a month, etc.

Question 6

4 Accounting Principles

Answer 6

1. Revenue Recognition
2. Expense Recognition (matching)
3. Measurement
4. Full Disclosure

Question 7

Revenue Recognition Principle

Answer 7

Revenue is recognized when it’s realized and earned
Recognized = recorded on the financial statements
Realized = received cash or near cash (A/R)
Earned = goods or service has been delivered

Question 8

Expense Recognition Principle (aka Matching)

Answer 8

Recognize expenses when they produce revenues

Question 9

Measurement Principle

Answer 9

Assets and liabilities are recorded at the value at the time of the origin
Historical Cost = Land
Amortized Cost = Plant & Equipment (historical cost less amortization)
Net Realizable Value = Accounts Receivable (receivable less allowance for doubtful accounts)
Replacement Cost = Inventory
Net Present Value = Bonds
Fair Value = Investments

Question 10

Full Disclosure Principle

Answer 10

Not all information can be recognized on the financial statements (footnotes)