Assumptions, Accounting Principles (conceptual framework)

Question 1

What are the four Accounting Assumptions?

Answer 1

1. Entity Assumption
2. Going-Concern Assumption
3. Unit-of-Measure Assumption
4. Time Period Assumption

Question 2

What is Entity Assumption?

Answer 2

We assume there is a separate accounting entity for each business organization (the owners and the corporation are separate)

Question 3

What is Going-Concern Assumption?

Answer 3

A business is assumed to have an indefinite life, that is, it will continue to be a going concern. Prepaid assets, such as prepaid rent, would not be assets without the assumption of continuity

Question 4

What is Unit-of-Measure Assumption?

Answer 4

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

Question 5

What is Time Period Assumption?

Answer 5

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

Question 6

What are the Accounting Principles?

Answer 6

1. Measurement
2. Revenue Recognition Principle
3. Expense Recognition Principle
4. Full Disclosure Principle

Question 7

What is Measurement?

Answer 7

At the time of origination, assets and liabilities are recorded at the market value of the item on the date of acquisition, usually the cash equivalent

Question 8

What are the 5 attributes to Measurement?

Answer 8

1. Net Realizable Value
2. Current Replacement Cost
3. Fair Value
4. Amortized Cost
5. Net Present Value

Question 9

What is Net Realizable Value?

Answer 9

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

Question 10

What is Current Replacement Cost?

Answer 10

This value represents how much you would have to pay to replace an asset (replacement cost is also used in inventory valuation)

Question 11

What is Fair Value?

Answer 11

It is the price that would be received to sell an asset (or the price to settle a liability) in an orderly transaction from the perspective of a market participant at the measurement date

Question 12

What is Amortized Cost?

Answer 12

This value is historical cost less the accumulated amortization or depreciation of the asset (buildings and equipment are reported at historical cost less accumulated depreciation)

Question 13

What is Net Pres

Answer 13

This is the value determined from discounting the expected future cash flows (the discounted future cash flows are used in many capital budgeting decisions.)