KHALID AZIZ

0322*3385752

The Measurement Fundamentals of Financial Accounting

KHALID AZIZ

0322*3385752

JOIN KHALID AZIZ

FRESH CLASSES ICap module b & d

FINANCIAL ACCOUNTING, ECONOMICS & COST ACCOUNTING

INDIVIDUAL & GROUPS

KHALID AZIZ

0322*3385752

JOIN KHALID AZIZ

CRASH CLASSES OF MA-ECONOMICS-EXTERNAL

PREVIOUS..MICRO AND STATISTICS

IN JUST 15 DAYS

KHALID AZIZ

0322*3385752

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT: 0322-3385752 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK

19,F.B.AREA, KARACHI, PAKISTAN.

KHALID AZIZ

0322*3385752

Key Points

Four basic assumptions of financial accounting. The markets in which business entities operate and the

valuation bases used on the balance sheet. The principle of objectivity and how it determines the

dollar values that appear on the financial statements. The principles of matching, revenue recognition, and

consistency. Two exceptions to the principles of financial accounting

measurement: materiality and conservatism.

KHALID AZIZ

0322*3385752

Basic Assumptions

Economic entity Fiscal period Going concern Stable dollar

KHALID AZIZ

0322*3385752

Economic Entity

A company is assumed to be a separate economic entity that can be identified and measured.

This concept helps determine the scope of financial statements.

Examples — Disney and ABC, General Electric and NBC.

KHALID AZIZ

0322*3385752

Fiscal Period

It is assumed that the life of an economic entity can be broken down into accounting periods.

The result is a trade-off between objectivity and timeliness.

Alternative accounting periods include the calendar or fiscal year.

KHALID AZIZ

0322*3385752

Going Concern

The life of an economic entity is assumed to be indefinite.

Assets, defined as having future economic benefit, require this assumption.

KHALID AZIZ

0322*3385752

Stable Dollar

The value of the monetary unit used to measure an economic entity’s performance and position is assumed stable.

If true, the monetary unit must maintain constant purchasing power.

Inflation, however, changes the monetary unit’s purchasing power.

This is considered an unrealistic assumption and thus places a limit on the financial statements as a tool for analysis.

KHALID AZIZ

0322*3385752

Valuations on the Balance Sheet

Input market– Purchase of materials, labor, overhead

Output market– Sales of services or inventories

Alternative valuation bases– Present value– Fair market value– Replacement cost– Original cost

KHALID AZIZ

0322*3385752

Present Value as a Valuation Base

Discounted future cash inflows and outflows

For example, the present value of a notes receivable is calculated by determining the amount and timing of its future cash inflows and adjusting the dollar amounts for the time value of money.

KHALID AZIZ

0322*3385752

Fair Market Value as a Valuation Base

Sales price or the value of goods and services in the output market.

For example, accounts receivable are valued at net realizable value which approximates fair market value.

KHALID AZIZ

0322*3385752

Replacement Cost as a Valuation Base

Current cost or the current price paid in the input market.

For example, inventories are valued at original cost or replacement cost, whichever is lower.

KHALID AZIZ

0322*3385752

Original Cost as a Valuation Base

Input price paid when originally purchased.

For example, land and property used in a company’s operations are all valued at original cost.

KHALID AZIZ

0322*3385752

Principles of Financial Accounting Measurement

Objectivity Matching Revenue recognition Consistency

KHALID AZIZ

0322*3385752

The Objectivity Principle

This principle requires that the values of transactions and the assets and liabilities created by them be verifiable and backed by documentation.

For example, present value is only used when future cash flows can be reasonably determined.

KHALID AZIZ

0322*3385752

The Revenue Recognition Principle

This principle determines when revenues can be recognized.

This principle triggers the matching principle, which is necessary for determining the measure of performance.

The most common point of revenue recognition is when goods or services are transferred or provided to the buyer.

KHALID AZIZ

0322*3385752

The Matching Principle

This principle states that the efforts of a given period should be matched against the benefits they generate.

For example, the cost of inventory is capitalized as an asset on the balance sheet and not recorded in Cost of Goods Sold until sold.

KHALID AZIZ

0322*3385752

The Matching Process

Incur costIncur cost

KHALID AZIZ

0322*3385752

The Matching Process

Incur costIncur costPeriod

revenue is generated?

Period revenue is generated?

KHALID AZIZ

0322*3385752

The Matching Process

Incur costIncur costPeriod

revenue is generated?

Period revenue is generated?

ExpenseExpense

Currentperiod

KHALID AZIZ

0322*3385752

The Matching Process

Incur costIncur costPeriod

revenue is generated?

Period revenue is generated?

ExpenseExpense

CapitalizeCapitalize

Futureperiod

KHALID AZIZ

0322*3385752

The Matching Process

Incur costIncur costPeriod

revenue is generated?

Period revenue is generated?

ExpenseExpense

CapitalizeCapitalize

????

KHALID AZIZ

0322*3385752

The Consistency Principle

Generally accepted accounting principles allow a number of different, acceptable methods of accounting.

This principle states that companies should choose a set of methods and use them from one period to the next.

For example, a change in the method of accounting for inventory would violate the consistency principle.

KHALID AZIZ

0322*3385752

Exceptions to the Basic Principles

Materiality– Only transactions with amounts large enough to

make a difference are considered material.– Nonmaterial transactions are ignored

Conservatism– When in doubt

• Understate assets• Overstate liabilities• Accelerate recognition of losses• Delay recognition of gains

KHALID AZIZ

0322*3385752

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT: 0322-3385752 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK

19,F.B.AREA, KARACHI, PAKISTAN.