Accounting Ch 3 measurement terms

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Accounting Ch 3 measurement terms
2012-06-06 03:11:21
measurement terms

terms used to describe the process of measuring
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  1. Basic Assumptions
    • - Economic Entity
    • - Fiscal Period
    • - Going Concern
    • - Stable Dollar
  2. Economic Entity
    • A company is assumed to be a separate economic entity that can be identified and measured.
    • It helps determine the scope of a financial statement
    • -Example: Disney and ABC, General Electric and NBC
  3. Fiscal Period (periodically)
    an economic entity broken down into periods

    the results are a breakdown of time and objectiveness

    alternative accounting periods are the calendar or fiscal year
  4. Going Concern
    • the life of an economic entity is assumed to be indefinite
    • -assets, defined to have future economic benefit
    • -allocation of costs is supported by the Going Concern assumption
  5. Stable Dollar ( Monetary Unit)
    • the value of a monetary unit used to measure an economic entities performance and position assumed it is stable
    • -If true, the monetary unit must maintain constant purchasing power
    • - Inflation, however changes the unit monetary purchasing power
    • - If inflation is material, the stable dollar is assumed invalid.
  6. Valuation on the Balance Sheet
    • –Input market: cost to purchase materials, labor, overhead
    • –Output market: value received from sales of services or inventories
    • lAlternative
    • valuation bases
    • –Present value
    • –Fair market value
    • –Replacement cost
    • –Original (historical) cost
  7. Input Market
    Cost to purchase materials, labor and overhead
  8. Output market
    Value received from sales of services or inventories
  9. Present Value
    lDiscounted future cash inflows and outflows

    • lFor example, the present value of a notes receivable is
    • calculated by determining the amount and timing of its future cash inflows and
    • adjusting the dollar amounts for the time value of money.
  10. Fair Market Value as a valuation base
    • lFair market value is measured by the sales price or the value
    • of goods and services in the output market.

    • lFor example, accounts receivable are valued at net realizable
    • value which approximates fair market value.
  11. Replacement cost as a valuation base
    The current price or the current cost paid in the input market

    For example inventories are place at original cost or replacement cost, whichever is lower.
  12. Historical Cost
    • the input cost at which the the paid price when the asset was originally purchased.
    • For example land.
  13. Principle of Financial Account Measurement
    • lWhen transactions occur, we must decide when to
    • recognize the transactions in the financial statements, and how to measure the transactions.

    lThe principles of recognition and measurement are:


    • –Revenue
    • recognition


  14. The Objectivity Principle
    • lThis principle requires that the values of transactions and
    • the assets and liabilities created by them be verifiable and backed by
    • documentation.
    • For example, present value is only used when future cash
    • flows can be reasonably determined
  15. The Revenue Recognition Principle
    • Determines when revenues can be recognized.
    • Triggers the matching principle to which is necessary to measure performance.
    • lThe most common point of revenue recognition is when goods orservices are transferred or provided to the buyer (at delivery).
  16. Matching Principle
    • Focuses on the timing of recognition of expences after revenue recognition has been determined.
    • States that the effort of a given period (expenses) should be matched against the period of benefits (revenues) they generate
    • For example, the cost of
    • inventory is initially capitalized as an asset on the balance sheet; it is not
    • recorded in Cost of Goods Sold (expense) until the sale is recognized
  17. The Consistancy Principle
    • GAAP that allow for a number of different acceptable accounting methods of accounting.
    • The priniciple states that a company should stick with the methods and continue to use them from one period to the next. .
  18. Materiality
    An exception to constraints, states that only transactions with a large enough sum of money should be reports, ie they are not going to report the purchase of a five dollar trash can.
  19. Conservatism
    • An exception to constaints, this takes a conservative route when determining the valuation tranactions.
    • When in doubt
    • -understate assets
    • -overstate liabilities
    • -accelerate recognition of losses
    • -delay recognitions of gains