Assumptions and Principles in Financial Reporting

Assumptions and Principles in Financial Reporting -...

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Assumptions and Principles in Financial Reporting To develop accounting standards, the FASB relies on some key assumptions and principles. Monetary Unit Assumption The monetary unit assumption requires that only those things that can be expressed in money are included in the accounting records. Because the exchange of money is fundamental to business transactions, it makes sense that we measure a business in terms of money. However, the monetary unit assumption also means that certain important information needed by investors, creditors, and managers is not reported in the financial statements. For example, customer satisfaction is important to every business, but it is not easily quantified in dollar terms; thus it is not reported in the financial statements. Economic Entity Assumption Ethics Note The importance of the economic entity assumption is illustrated by scandals involving Adelphia. In this case, senior company employees entered into transactions that blurred the line between the employees' financial interests and those of the company. For example, Adelphia guaranteed over $2 billion of loans to the founding family. The economic entity assumption states that every economic entity can be separately identified and accounted for. For example, suppose you are a stockholder of Best Buy. The amount of cash you have in your personal bank account and the balance owed on your personal car loan are not
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This document was uploaded on 11/03/2011 for the course ACCOUNTING ac 201 at Montgomery.

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Assumptions and Principles in Financial Reporting -...

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