10 Questions
What is the primary purpose of generally accepted accounting principles (GAAP)?
To provide information relevant to decision-making
Which international group has been working to reduce differences in accounting practices across countries?
The International Accounting Standards Board
What is the role of the International Accounting Standards Board (IASB) in the context of accounting standards?
Work towards reducing differences in accounting practices globally
Which principle is introduced in this text as one of the basic principles of accounting?
Cost Principle
What does the Cost Principle emphasize when valuing assets?
Historical cost
Why is it important for accounting standards to change over time?
To ensure the provision of relevant decision-making information
What is the focus of generally accepted accounting principles (GAAP) when preparing accounting information?
Offering information relevant to decision-making
'Internationally, accounting standards can vary from country to country' - why is this a challenge?
'One-size-fits-all' standards reduce diversity but increase comparability
'Chapter 12 explores these principles, and the underlying assumptions and constraints of accounting, in greater detail.' - What does this statement imply?
Chapter 12 provides detailed explanations of principles, assumptions, and constraints.
How do generally accepted accounting principles (GAAP) contribute to decision-making processes?
By providing relevant information that aids in making informed decisions.
Study Notes
Cost Principle
- Assets should be recorded at their original historical cost, which is the value exchanged at the time of acquisition.
- Cost is reliable and verifiable, based on facts, unlike market values which can be subjective.
Fair Market Value vs. Cost
- Fair market value is the value determined by the market at a particular time, whereas cost is the value exchanged at the time of acquisition.
- At the time of acquisition, cost and fair market value are the same, but they may vary in later periods.
Importance of Cost Principle
- The cost principle is important because cost is definite and verifiable, providing reliable information.
- Market values can be subjective and may not provide useful information, whereas cost is based on fact.
Greyhound Example
- Greyhound had 128 bus stations with a cost of approximately $200 million, but a current market value of $1 billion.
- Under the cost principle, the bus stations are recorded and reported at $200 million, not $1 billion.
Going Concern Assumption
- The going concern assumption assumes that the firm will continue to operate in the foreseeable future.
- This assumption presumes that the company will operate long enough to utilize its assets to fulfill its commitments.
Other Assumptions
- The monetary unit assumption and the economic entity assumption are other important basic assumptions in accounting.
- These assumptions provide a foundation for the accounting process.
Test your knowledge on the accounting principle that assets should be recorded at their original historical cost. Understand the difference between cost and fair market value when acquiring assets.
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