Chapter Two: Accounting Judgments:
- General body of accounting concepts consists of 3 different categories:
o Underlying assumptions
Form the foundation upon which all accounting measurements rests ex.
Accounting
...
Chapter Two: Accounting Judgments:
- General body of accounting concepts consists of 3 different categories:
o Underlying assumptions
Form the foundation upon which all accounting measurements rests ex.
Accounting principle of going concern
o Qualitative assumptions
Used to evaluate the possible measurement options and choose the most suitable
method
o Measurement methods
Various ways the financial position and results of operations are reported. Ex.
Accounting principles of fair value and realizable value are examples of
measurement methods, both are based on the underlying assumption of
continuity
- Measurement methods are how transactions and events are measured and reported; qualitative
criteria are why they are measured, providing the underlying assumptions are valid
- Ex. Historic cost is a measurement method in which assets are reported at their acquisition cost.
Historical cost is mainly used because It is seen as being more verifiable (qualitative criteria),
However, the use of historic cost depends on the reporting enterprise’s continuity as a functioning
business (underlying assumption)
Structure of accounting policy choice:
- To construct fs for a company we must:
o Consider the facts/constraints of the entity
o Determine the objectives of financial reporting
o Make sure the underlying assumptions are valid
o Measure the elements of FS using situation-specific measurement methods that satisfy
qualitative criteria
o Prepare the FS
Ethical professional judgment:
- Accountants must act ethically and exercise judgment to be fair to all stakeholders
Underlying Assumptions:
- There are (1) universal assumptions (essential to making financial reports feasible and
meaningful), (2) entity-specific assumptions that are very common but actually depend on an
individual entity’s reporting circumstances
- Universal Assumptions:
o 1. Time period:
Meaningful information can be assembled and recorded for a time period that is
less than the company’s lifespan
One year is the standard
o 2. Separate entity:
The enterprise can be accounted for and reported independent of its owners and
stakeholders
Personal and private transactions are seperated
Ex. An entity carried out as a corporation may be inseparable from its owner if it
has a single shareholder who is the owner/manager and who mingles business
and personal finances
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