Accounting Ch 3 measurement terms
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Accounting Ch 3 measurement terms
terms used to describe the process of measuring
- Economic Entity
- Fiscal Period
- Going Concern
- Stable Dollar
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
: Disney and ABC, General Electric and NBC
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
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
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.
Valuation on the Balance Sheet
: cost to purchase materials, labor, overhead
: value received from sales of services or inventories
–Fair market value
–Original (historical) cost
Cost to purchase materials, labor and overhead
Value received from sales of services or inventories
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.
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.
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.
the input cost at which the the paid price when the asset was originally purchased.
For example land.
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:
The Objectivity Principle
lThis principle requires that the values of transactions and
the assets and liabilities created by them be verifiable and backed by
For example, present value is only used when future cash
flows can be reasonably determined
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).
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
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. .
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.
An exception to constaints, this takes a conservative route when determining the valuation tranactions.
When in doubt
-accelerate recognition of losses
-delay recognitions of gains