GAAP

Question 1

Economic Entity Assumption

Answer 1

Transactions of a business must be kept separate from personal transactions

Question 2

Monetary Unit Assumption

Answer 2

Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S.
dollars are recorded. Impact of inflation is ignored.

Question 3

Time Period Assumption

Answer 3

This accounting principle assumes the ongoing activities of a business can be stated in time
intervals such as the quarter ended March 31, 2014, or the month ended February 28, 2015

Question 4

Going Concern Assumption

Answer 4

This accounting principle assumes that a company will exist long enough to carry out its mission
and will not liquidate in the foreseeable future. If the company’s financial situation is such that the
accountant believes the company will not be able to continue on, the accountant is required to
disclose this assessment.

Question 5

Measurement - Cost Principle

Answer 5

Amounts are stated at historical cost whether it was last month or 20 years ago. Amounts are not
adjusted up for inflation or are reflective of market conditions

Question 6

Measurement - Fair Value Principle

Answer 6

Market based measure that is in some cases more relevant than historical cost

Question 7

Full Disclosure Principle

Answer 7

If certain information is important to external users of the financial statements, that information
should be disclosed within the statement or in the notes to the statements.

Question 8

Revenue Recognition Principle

Answer 8

Under the accrual basis of accounting revenues are recognized as soon as a product has been sold
or a service has been performed, regardless of when the money is actually received.

Question 9

Matching Principle

Answer 9

This accounting principle requires companies to use the accrual basis of accounting. The matching
principle requires that expenses be matched with revenues in the period they are incurred.

Question 10

Materiality

Answer 10

Because of this basic accounting principle or guideline, an accountant might be allowed to violate
another accounting principle if an amount is insignificant. Professional judgment is used to decide
whether an amount is insignificant or immaterial.

Question 11

Conservatism

Answer 11

This simply means that accountants should err on the side of understating revenue and overstating
expense. A potential legal liability would be recorded as an expense if reasonable but a similar
potential award of revenue from a lawsuit would not be stated as income.

Question 12

Consistency

Answer 12

It is important that accounting principles, policies and procedures are followed in a consistent
manner. Often times auditors will ask what your past practice is and will emphasize to remain
consistent.