Exercises 67 E2-6 (LO5,6) (Assumptions, Principles, and Constraint Presented bel

Question

Exercises 67 E2-6 (LO5,6) (Assumptions, Principles, and Constraint Presented below ane the assumptions, principles, and constraint used in this chapter. 1. Economic entity assumption 2. Going concern assumption 3. Monetary unit assumption 4. Periodicity assumption 5. Measurement principle (historical cost) 6. Measurement principle (fair value 7. Expense recognition principle 8. Full disclosure principle 9. Cost constraint Revenue recognition principle Identify by number the accounting assumption, principle. or more than once. t that describes each situation below. Do not use a number a) Allocates expenses to revenues in the proper period b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recogni tion principle.) (c) Ensures that all relevant financial information is td) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle) fe) Indicates that personal and business record keeping should be separately maintained to D Separates financial information into time periods for reporting purposes. 8) Assumes that the dollar is the "measuring stick used to report on financial performance

Explanation / Answer

(a) should match with 7:

This is the matching of expenses in the period in which the related revenues are occurred.

(b) should match with 5:

This is the principle of historical cost, where fair market values of assets are not considered.

(c) should match with 8:

This is the principle of full disclosure, where all relevant information must be stated in financial reports so that stakeholders’ interests are protected. They can take decision accordingly.

(d) should match with 2:

This is because of going concern concept. It is assumed that firms will go on their operations year after year until it is forcefully liquidated. Since the assumption is to go forever, assets can’t be in liquidation values.

(e) should match with 1:

This is the entity concept. It says that every business firm has separate legal entity, which separates business records from personal records.

(f) should match with 4:

This is the concept of periodicity. It indicates reporting of data based on a specific time frame; suppose revenues for the period of 2017 should be in the income statement of 2017 but not in the income statement of 2018.

(g) should match with 3:

Dollar is a monetary unit, which is used for recording data. Suppose an income statement should follow only one such monetary unit; there should not be more than one such unit like rupee, yen, etc. This is required for removing ambiguity.

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