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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Exercise 2-36 Assumptions and Principles

Presented below are the four assumptions and four principles used in measuring and reporting accounting information.

Chapter 2, Problem 36E, Exercise 2-36 Assumptions and Principles Presented below are the four assumptions and four

Required:

Identify the assumption or principle that best describes each situation below.

  1. Requires that an activity be recorded at the exchange price at the time the activity occurred.
  2. Allows a company to report financial activities separate from the activities of the owners.
  3. Implies that items such as customer satisfaction cannot be reported in the financial statements.
  4. Specifies that revenue should only be recognized when a company has satisfied its performance obligation to a customer.
  5. Justifies why some assets and liabilities are not reported at their value if sold.
  6. Allows the life of a company to be divided into artificial time periods so accounting reports can be provided on a timely basis.
  7. Is a prudent reaction to uncertainty.
  8. Requires that expenses be recorded and reported in the same period as the revenue that it helped generate.

To determine

Accounting Concept:

The assumptions and principles which guide the recording and reporting of financial information are termed as accounting concept. The financial statements are basically the conclusion of the financial record during an accounting period.

Identify the assumption or principle that best describes each situation.

Explanation

Economic Entity: In the eyes of law the business and its owner is considered to be a separate entity. Hospitals, bank, municipalities, companies are few example of an economic entity.

Going-Concern: According to accounting principle of going concern, a business enterprise is presumed to continue until date of liquidation. In other words, owners or investors may come and go but business continue exist.

Time-Period: In order to divide the life of Business Corporation, all the accounting records should be concluded at the end of each accounting period to evaluate the ultimate financial performance of a business enterprise. All the financial information and statements are prepared based on predetermined accounting period.

Monetary Unit: All the financial information should recorded and reported in the monetary unit. In simple words, all the business transaction should be recorded in terms of money...

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