We have just covered four assumptions in accounting:
Accounting Entity
A corporation is considered a “living, fictional” being.
Going Concern
A corporation is assumed to remain in existence indefinitely.
Measurement and 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.
1. Accounting Entity and Going Concern
Exercise
Q1:
What are some of the attributes of a company?
It has a name, birthdate, and birthplace.
It can file lawsuits and, conversely, be sued.
Taxes are filed by shareholders on behalf of the company.
It is assumed to continue operating indefinitely.
2. Measurement
Exercise
Q1:
The following activities cannot be explicitly disclosed on the financial statements:
Borrowing from lenders
Tax payments
Value of internally developed patents
Value of top management to a company
3. Periodicity
Exercise
Q1:
For reporting purposes to the SEC, a company’s life is broken down into:
