- - Economic Entity
- - Fiscal Period
- - Going Concern
- - Stable Dollar
- A company is assumed to be a separate economic entity that can be identified and measured.
- It helps determine the scope of a financial statement
- -Example: Disney and ABC, General Electric and NBC
Fiscal Period (periodically)
an economic entity broken down into periods
the results are a breakdown of time and objectiveness
alternative accounting periods are the calendar or fiscal year
- the life of an economic entity is assumed to be indefinite
- -assets, defined to have future economic benefit
- -allocation of costs is supported by the Going Concern assumption
Stable Dollar ( Monetary Unit)
- the value of a monetary unit used to measure an economic entities performance and position assumed it is stable
- -If true, the monetary unit must maintain constant purchasing power
- - Inflation, however changes the unit monetary purchasing power
- - If inflation is material, the stable dollar is assumed invalid.
Valuation on the Balance Sheet
- –Input market: cost to purchase materials, labor, overhead
- –Output market: value received from sales of services or inventories
- valuation bases
- –Present value
- –Fair market value
- –Replacement cost
- –Original (historical) cost
Cost to purchase materials, labor and overhead
Value received from sales of services or inventories
lDiscounted future cash inflows and outflows
- lFor example, the present value of a notes receivable is
- calculated by determining the amount and timing of its future cash inflows and
- adjusting the dollar amounts for the time value of money.
Fair Market Value as a valuation base
- lFair market value is measured by the sales price or the value
- of goods and services in the output market.
- lFor example, accounts receivable are valued at net realizable
- value which approximates fair market value.
Replacement cost as a valuation base
The current price or the current cost paid in the input market
For example inventories are place at original cost or replacement cost, whichever is lower.
- the input cost at which the the paid price when the asset was originally purchased.
- For example land.
Principle of Financial Account Measurement
- lWhen transactions occur, we must decide when to
- recognize the transactions in the financial statements, and how to measure the transactions.
lThe principles of recognition and measurement are:
The Objectivity Principle
- lThis principle requires that the values of transactions and
- the assets and liabilities created by them be verifiable and backed by
- For example, present value is only used when future cash
- flows can be reasonably determined
The Revenue Recognition Principle
- Determines when revenues can be recognized.
- Triggers the matching principle to which is necessary to measure performance.
- lThe most common point of revenue recognition is when goods orservices are transferred or provided to the buyer (at delivery).
- Focuses on the timing of recognition of expences after revenue recognition has been determined.
- States that the effort of a given period (expenses) should be matched against the period of benefits (revenues) they generate
- For example, the cost of
- inventory is initially capitalized as an asset on the balance sheet; it is not
- recorded in Cost of Goods Sold (expense) until the sale is recognized
The Consistancy Principle
- GAAP that allow for a number of different acceptable accounting methods of accounting.
- The priniciple states that a company should stick with the methods and continue to use them from one period to the next. .
An exception to constraints, states that only transactions with a large enough sum of money should be reports, ie they are not going to report the purchase of a five dollar trash can.
- An exception to constaints, this takes a conservative route when determining the valuation tranactions.
- When in doubt
- -understate assets
- -overstate liabilities
- -accelerate recognition of losses
- -delay recognitions of gains