Accounting Assumptions Economic Entity the financial statements assume that we are dealing with a single organization, but

t this gets tricky when we want to slice and dice the financial statements to understand what is happening with a particular product or division within the organization. Monetary Unit we keep score with money and we typically ignore inflation and deflation of currencies; the value and unit of currency is assumed to be stable, unless we are transacting with international divisions that use other currencies besides the U.S. Dollar. Accounting Periods we assume that it makes sense to have monthly, quarterly, and annual accounting periods where we stop to assemble financial statements. Fiscal years sometimes dont align with calendar years. Accounting Principles Historical Costs assets (and liabilities) are typically reported at the historical cost and then adjusted with fair market value when the needs of reporting require it. However, the cost of an asset 10 years ago does not reflect what it is worth to another buyer or the cost of replacement. Revenue Recognition we record revenues when they are realized (i.e., we become aware) and earned (i.e., we do or ship something). This is one of challenges that accrual-based accounting is trying to solve. Just because we received cash from a sales order doesnt mean that we did everything we had to do to earn the revenue or ship the product. Also, we may have sold something but not received cash. Accounting Constraints Materiality small financial events are not as important large financial events to the typical, reasonable reader of financial statements. That makes sense but our decision making process may be different from the typical user of financial statements as understood by the accounting folks; some small financial event may not be disclosed even though it is very relevant to our decision. Industry Practice one size does not fit all when reporting financial activities. Some industries have peculiar products/services or have special ways of distributing the products/services to customers, so we cannot understand an Internet retailer the same way we would analyze and automobile manufacturer. Reference Keiso, D, Weygandt, J, & Warfield, T. (2002). Intermediate Accounting, 11th Ed. New

York, New York: John Wiley & Sons.