AC 301 Lecture on The conceptual Framework and Objectives of Financial Reporting
What are some principles underlying GAAP, accounting assumptions, and modifying conventions? First, the going-concern assumption is the assumption that the business will continue to exist therefore there is no reason to change the values to market value on a daily basis. Economic-entity assumption is the recognition that the firm exists on its own then therefore separates itself from the owner. Monetary-unit assumption is that currency values are used as values for all transactions and reports. Periodicity assumption is that the reports be made periodically. Matching convention is the matching of revenues and expenses within the correct period. Historical convention is to use original cost values instead of using market value. Full-disclosure convention is to disclose relevant info not disclosed on the financial reports which should be entered in the notes of the financial reports. Cost-benefit constraint is to expense when the benefit to the firm is equal to or greater than the cost. Industry practices are the methods used for a particular industry. Conservatism is the choice to use the lower value if a question arises for the value. Materiality is the need to judge whether to recognize an item on its own rather than to be part of another classification.
What are the basic building blocks of the financial statements? First, the assets are the resources of the company. The liabilities are the debts of the firm. Equity or net assets are the net worth of the company. Investments by owners are the purchases of tangible assets. Distribution to the owners is the dividends. Comprehensive income includes realized and non-realized income direct to equity. Revenues are the earning of the firm. Expenses are the necessary expenditures in order to have earnings. Gains are when sales are greater than the book value of the tangible asset sold and losses when the selling price is less than...