Crash Course in Accounting and Financial Statement Analysis, Second Edition

Assumptions

U.S. Generally Accepted Accounting Principles (GAAP) have been established as a way to standardize the presentation of financial information.

The Financial Accounting Standards Board (FASB) attempts to base U.S. GAAP on a number of key theoretical assumptions, principles, and constraints (Exhibit 2.1). They are introduced in this chapter, and frequently highlighted in the Basic Principles Revisited sidebar throughout the book.

Exhibit 2.1. Assumptions, Principles, and Constraints Governing U.S. GAAP

ASSUMPTIONS
Accounting Entity	A corporation is considered a “living, fictional” being.
Going Concern	A corporation is assumed to remain in existence indefinitely.
Measurement & 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.
PRINCIPLES
Historical Cost	Financial statements report companies’ resources and obligations at an initial historical cost. This conservative measure precludes constant appraisal and revaluation.
Revenue Recognition	Revenues must be recorded when earned and measurable.
Matching Principle	Costs of a product must be recorded during the same period as revenue from selling it.
Disclosure	Companies must reveal all relevant economic information ...