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Consistencygenerally requires that a company use the same accounting principles andreporting practices through time. This concept prohibits indiscriminate switching of accountingprinciples or methods, such as changing inventory methods every year. However, consistency doesnot prohibit a change in accounting principles if the information needs of financial statement usersare better served by the change. When a company makes a change in accounting principles, it mustmake the following disclosures in the financial statements: (1) nature of the change; (2) reasons forthe change; (3) effect of the change on current net income, if significant; and (4) cumulative effectof the change on past income.Chapter 2 introduced the basic accounting concept of the double-entry method of recordingtransactions. Under the double-entry approach, every transaction has a two-sided effect on eachparty engaging in the transaction. Thus, to record a transaction, each party debits at least oneaccount and credits at least one account. The total debits equal the total credits in each journalentry.When learning how to prepare work sheets in Chapter 4, you learned that financial statementsare fundamentally related and articulate(interact) with each other. For example, we carry theamount of net income from the income statement to the statement of retained earnings. Then wecarry the ending balance on the statement of retained earnings to the balance sheet to bring totalassets and total equities into balance.
In Exhibit 27 we summarize the underlying assumptions or concepts. The next section discussesthe measurement process used in accounting.The measurement process in accountingEarlier, we defined accounting as "the process of identifying, measuring, and communicatingeconomic information to permit informed judgments and decisions by the users of theinformation".3In this section, we focus on the measurement process of accounting.Accountants measure a business entity's assets, liabilities, and stockholders' equity and anychanges that occur in them. By assigning the effects of these changes to particular time periods(periodicity), they can find the net income or net loss of the accounting entity for those periods.Accountants measure the various assets of a business in different ways. They measure cash at itsspecified amount. Chapter 9 explains how they measure claims to cash, such as accountsreceivable, at their expected cash inflows, taking into consideration possible uncollectibles. Theymeasure inventories, prepaid expenses, plant assets, and intangibles at their historical costs (actualamounts paid). After the acquisition date, they carry some items, such as inventory, at the lower-of-cost-or-market value. After the acquisition date, they carry plant assets and intangibles at originalcost less accumulated depreciation or amortization. They measure liabilities at the amount of cashthat will be paid or the value of services that will be performed to satisfy the liabilities.