Financial Accounting: In an Economic Context

CHAPTER 3

The Measurement Fundamentals of Financial Accounting

KEY POINTS

The following key points are emphasized in this chapter:

• Four basic assumptions of financial accounting.
• The markets in which business entities operate and the valuation bases used on the balance sheet.
• The principle of objectivity and how it determines the dollar values that appear on the financial statements.
• The principles of matching, revenue recognition, and consistency.
• Two exceptions to the principles of financial accounting measurement: materiality and conservatism.
• Fundamental differences between U.S. GAAP and IFRS.

Apple, Inc. has led the market for so-called smart phones with its iPhone, while competitors crowd the market daily with products such as the Pre from Palm and the Droid from Motorola. Manufacturers that sell these products are producing both hardware and software for their customers, selling the phone but also providing services to make the phone as functional as possible. Historically, the companies would record the revenue from the sale over the assumed life of the product, typically two years. Recently, however, the FASB approved changes that allow these companies to record more of the revenue in earlier periods of the phone's use. How do companies recognize revenue, and how are the financial statements affected? What might motivate management to recognize revenue early, and how might a company's stock price react to such behavior? This chapter covers the measurement fundamentals ...