Assumptions and Accounting Principles

Question 1

What are the Accounting Assumptions?

Answer 1

Ans:

1) Entity Assumption
2) Going-Concern Assumption
3) Unit of Measure Assumption

Question 2

Entity Assumption

Answer 2

there is a separate accounting entity for each business

Question 3

Going Concern Assumption

Answer 3

A business is assumed to have an indefinite life ( we do not show items at their liquidation or exit values).

Going Concern supports historical cost principle for many assets. Income measurement is based on historical cost of assets because assets provide value through use rather than disposal.

Question 4

Unit of Measure Assumption

Answer 4

Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of monetary unit of the country in which the business is operated.

Question 5

Physical Capital Maintenance

Answer 5

Earnings cannot be recognized until the firm has provided for the concept holds that earnings cannot be recognized until the firm has provided for the physical capital used up during the period.

Question 6

Time Period Assumption

Answer 6

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

Question 7

What are the accounting principles?

Answer 7

1) Measurement 2) Revenue Recognition 3) Expense Recognition

Question 8

Measurement

Answer 8

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 9

Net Realizable value

Answer 9

The value is used to approximate liquidation value of selling price. ( example lower cost or market for inventory valuation uses NRV).

Question 10

Current Replacement Cost

Answer 10

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.

Question 11

Fair Value

Answer 11

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

Question 12

Amortized cost

Answer 12

This value is historical cost less the accumulated amortization or depreciation of the asset.

Question 13

Net present value

Answer 13

This is the value determined from discounting the expected future cash flows.

Question 14

Revenue Recognition principle

Answer 14

The principle addresses three important issues related to revenues: Revenue Defined, When to recognize revenue, and measure revenue

Question 15

What are the five steps to allocate revenue?

Answer 15

Ans:

1) identify the contract with the customer
2) identify if there is more than one performance obligation
3) Determine the transaction price
4) Allocate the transaction price to the separate performance obligations ( if there is more than one performance obligation).
5) Recognize revenue when each performance obligation is satisfied.

Question 16

Measure Revenue

Answer 16

Revenues are measured at the cash equivalent amount of the good or service provided.

Question 17

Expense Recognition Principle

Answer 17

This principle addresses when to recognize expenses and is sometime referred to as the matching principle.

Question 18

Matching Principle

Answer 18

Recognize expenses only when expenditures help to produce revenues. Revenues are recognized when earned and realized or realized or realizable; the related expenses are recognized, and the revenues and expenses are matuch to determine net income or loss.

Question 19

Full Disclosure Principle

Answer 19

Financial statements should present all information needed by an informed reader to make an economic decision ( Adequate Disclosure Principle).