E2-4B (Assumptions, Principles, and Constraints) Presented below are the assumptions, principles, and constraints used in this chapter.
1. Economic entity assumption 5. Historical cost principle 9. Materiality
2. Going concern assumption 6. Matching principle 10. Industry practices
3. Monetary unit assumption 7. Full disclosure principle 11. Conservatism
4. Periodicity assumption 8. Cost-benefit relationship
Instructions
Identify by number the accounting assumption, principle, or constraint that describes each situation below.
Do not use a letter more than once.
(a) Permits the use of market value valuation in certain specific situations.
(b) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)
(c) Allocates expenses to revenues in the proper period.
(d) Indicates that personal and business record keeping should be separately maintained.
(e) Ensures that all relevant financial information is reported.
(f) Indicates that market value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)
(g) Anticipates all losses, but reports no gains.
(h) Separates financial information into time periods for reporting purposes.
(i) Assumes that the dollar is the “measuring stick” used to report on financial performance.
(j) Requires that information significant enough to affect the decision of reasonably informed users should be disclosed. (Do not use full disclosure principle.)
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