E2-4 - Assumptions, Principles, and Constraints
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E2-4 (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) Allocates expenses to revenues in the proper period.
(b) Indicates that market value changes subsequent to purchase are not recorded in the accounts. (Do
not use revenue recognition principle.)
(c) Ensures that all relevant financial information is reported.
(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)
(e) Anticipates all losses, but reports no gains.
(f) Indicates that personal and business record keeping should be separately maintained.
(g) Separates financial information into time periods for reporting purposes.
(h) Permits the use of market value valuation in certain specific situations.
(i) Requires that information significant enough to affect the decision of reasonably informed users
should be disclosed. (Do not use full disclosure principle.)
(j) Assumes that the dollar is the "measuring stick" used to report on financial performance.
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Solution Summary
The problem lists the Assumptions, Principles, and Constraints used as a basis for accounting and asks for the theory to be matched to ten practical accounting situations.
Solution Preview
a. 6. Matching principle
b. 5. Historical cost principle
c. 7. Full disclosure ...
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