Financial Accounting: In an Economic Context

SUMMARY OF KEY POINTS

Four basic assumptions of financial accounting.

The four basic assumptions of financial accounting are (1) the economic entity assumption, (2) the fiscal period assumption, (3) the going concern assumption, and (4) the stable dollar assumption. The economic entity assumption states that a company is a separate economic entity that can be identified and measured. The fiscal period assumption states that the life of an economic entity can be broken down into fiscal periods. The going concern assumption states that the life of an economic entity is indefinite. The stable dollar assumption states that the value of the monetary unit used to measure an economic entity's financial performance and position is stable across time.

The markets in which business entities operate and the valuation bases used on the balance sheet.

A business entity operates in two general markets: an input market, where it purchases inputs for its operations; and an output market, where it sells the outputs that result from its operations. The four valuation bases (present value, fair market value, replacement cost, and original cost) can be defined in terms of these two markets.

The present value of an asset or liability represents the discounted future cash flows associated with the asset ...