Financial statements are prepared based on the following underlying assumptions:
Economic entity assumption
Business operations can be reported for an entity which is separate from its owners.
Going concern assumption
The entity will continue its operations in the foreseeable future.
Monetary unit assumption
Business activities can be measured in monetary units.
Periodicity assumption
Business operations can be reported separately in each accounting period.
Review Questions
1. Which organization develops Generally Accepted Accounting Principles (GAAP) to be applied in the United States?
Financial Accounting Standards Board (FASB)
2. Which accounting standards are applied to prepare financial statements of public entities operating in the member states of the European Union (EU)?
International Financial Reporting Standards (IFRS)
3. Which organization develops International Financial Reporting Standards (IFRS)?
International Accounting Standards Board (IASB)
4. Where can users access the text of IFRS?
5. Where can users access the codification of accounting standards applied in the United States?
6. What are the qualitative characteristics of useful financial information?
Qualitative characteristics of useful financial information are relevance and faithful representation
7. What are the components of relevance?
Relevant information has predictive value and confirmatory value.
8. What are the components of faithful representation?
For faithful representation, information should be complete, neutral and free from error.
9. What are the characteristics enhancing the usefulness of information?
Comparability, verifiability, timeliness and understandability are the characteristics enhancing the usefulness of information.
10. What is the pervasive constraint of financial reporting?
Benefits should be greater than the cost of providing information.