Accounting Principle: Historical Cost
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Questions and Answers

What is the primary purpose of generally accepted accounting principles (GAAP)?

  • To provide information relevant to decision-making (correct)
  • To ensure companies adhere to specific tax laws
  • To standardize corporate social responsibility practices
  • To regulate the stock market
  • Which international group has been working to reduce differences in accounting practices across countries?

  • The International Financial Reporting Standards Board
  • The International Accounting Ethics Committee
  • The International Taxation Bureau
  • The International Accounting Standards Board (correct)
  • What is the role of the International Accounting Standards Board (IASB) in the context of accounting standards?

  • Promote diversity in accounting practices
  • Work towards reducing differences in accounting practices globally (correct)
  • Develop unique standards for each country
  • Maintain and increase differences in standards across countries
  • Which principle is introduced in this text as one of the basic principles of accounting?

    <p>Cost Principle</p> Signup and view all the answers

    What does the Cost Principle emphasize when valuing assets?

    <p>Historical cost</p> Signup and view all the answers

    Why is it important for accounting standards to change over time?

    <p>To ensure the provision of relevant decision-making information</p> Signup and view all the answers

    What is the focus of generally accepted accounting principles (GAAP) when preparing accounting information?

    <p>Offering information relevant to decision-making</p> Signup and view all the answers

    'Internationally, accounting standards can vary from country to country' - why is this a challenge?

    <p>'One-size-fits-all' standards reduce diversity but increase comparability</p> Signup and view all the answers

    'Chapter 12 explores these principles, and the underlying assumptions and constraints of accounting, in greater detail.' - What does this statement imply?

    <p>Chapter 12 provides detailed explanations of principles, assumptions, and constraints.</p> Signup and view all the answers

    How do generally accepted accounting principles (GAAP) contribute to decision-making processes?

    <p>By providing relevant information that aids in making informed decisions.</p> Signup and view all the answers

    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.

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    Description

    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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