Underlying Principles and Modifying Conventions Flashcards
Conceptual Framework, Standard Setting, and Financial Reporting
What are the Underlying Principles
Historical Cost, Revenue Recognition, Matching Principle, Consistency, Full Disclosure, Objectivity, Verifiability, Separate Entity, GC (Continuity), Unit of Measure, Periodicity
Underlying Principles - Historical Cost Definition
business transactions should be recorded at original cost
the most objective measure of value used in accounting
Underlying Principles - Revenue Recognition Definition
recognized when earned, realizable, collectible
when the earning process is virtually complete
Underlying Principles - Matching Principle Definition
match revenues with expenses in same period to properly report profitability
match realized revenues with those expenses and expired costs necessary to generate them
Underlying Principles - Consistency Definition
an entity should apply the same acct procedures from period to period, to enhance FS comparability
Underlying Principles - Full Disclosure Definition
all material information should be disclosed in the FS
FS should provide the necessary information so that users can make informed business decisions about the company
Underlying Principles - Objectivity Defintition
financial and acct information needs to be independent and free from bias
Underlying Principles - Verifiability Definition
the information is objectively obtained
Underlying Principles - Separate Entity Definition
economic activities of the business are kept separate from those of its owners and other business entities
Underlying Principles - Continuity (Going Concern) Definition
an entity is assumed to have an indefinite life, or at least a life sufficiently long enough for it to accomplish its objectives and fulfill its legal obligations
Underlying Principles - Unit of Measure Definition
financial data should be measured using a common, stable, monetary unit
Underlying Principles - Periodicity Definition
the life of business is divided into artificial time periods (a year - 12 months)
Modifying Conventions - Conservatism Definition
the practice of prudence when there is uncertainty
Examples:
Expenses and liabilities should be recognized as soon as possible there is uncertainty about the outcome
revenues and assets should be recognized when they are assured of being recovered
LCM theory should be applied to inventory and certain securities
Modifying Conventions - Industry Practices Definition
it may be necessary for an entity to depart from strict compliance with GAAP due to the unique of the industry in which an entity operates
Modifying Conventions - Substance Over Form Definition
report the economic substance of an event over its legal form
