Summary
A number of key theoretical assumptions, principles, and constraints (Exhibit 2.3) govern U.S. GAAP and form the conceptual framework of the financial reporting of U.S. companies. Accordingly, take a moment to review this accounting framework before moving on to the next chapter.
ASSUMPTIONS | |
Accounting Entity | A corporation is considered a “living, fictional” being. |
Going Concern | A corporation is assumed to remain in existence indefinitely. |
Measurement & Units of Measure | Financial statements show only measurable activities of a company. Financial statements must be reported in the national monetary unit (i.e., U.S. dollars for U.S. companies). |
Periodicity | A company’s continuous life can be divided into measured periods of time for which financial statements are prepared. U.S. companies are required to file quarterly and annual reports. |
PRINCIPLES | |
Historical Cost | Financial statements report companies’ resources and obligations at an initial historical cost. This conservative measure precludes constant appraisal and revaluation. |
Revenue Recognition | Revenues must be recorded when earned and measurable. |
Matching Principle | Costs of a product must be recorded during the same period as revenue from selling it. |
Disclosure | Companies must reveal all relevant economic information determined to make a difference to their users. |
CONSTRAINTS | |
Estimates & Judgments | Certain measurements cannot be performed completely accurately, ... |
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