Crash Course in Accounting and Financial Statement Analysis, Second Edition

Summary

A number of key theoretical assumptions, principles, and constraints (Exhibit 2.3) govern U.S. GAAP and form the conceptual framework of the financial reporting of U.S. companies. Accordingly, take a moment to review this accounting framework before moving on to the next chapter.

Exhibit 2.3. Summary of 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 determined to make a difference to their users.
CONSTRAINTS
Estimates & Judgments	Certain measurements cannot be performed completely accurately, ...