khalid aziz 0322*3385752 the measurement fundamentals of financial accounting
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KHALID AZIZ
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The Measurement Fundamentals of Financial Accounting
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FRESH CLASSES ICap module b & d
FINANCIAL ACCOUNTING, ECONOMICS & COST ACCOUNTING
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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.
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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.
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Basic Assumptions
Economic entity Fiscal period Going concern Stable dollar
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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.
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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.
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Going Concern
The life of an economic entity is assumed to be indefinite.
Assets, defined as having future economic benefit, require this assumption.
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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.
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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
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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.
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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.
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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.
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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.
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Principles of Financial Accounting Measurement
Objectivity Matching Revenue recognition Consistency
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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.
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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.
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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.
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The Matching Process
Incur costIncur cost
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The Matching Process
Incur costIncur costPeriod
revenue is generated?
Period revenue is generated?
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The Matching Process
Incur costIncur costPeriod
revenue is generated?
Period revenue is generated?
ExpenseExpense
Currentperiod
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The Matching Process
Incur costIncur costPeriod
revenue is generated?
Period revenue is generated?
ExpenseExpense
CapitalizeCapitalize
Futureperiod
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The Matching Process
Incur costIncur costPeriod
revenue is generated?
Period revenue is generated?
ExpenseExpense
CapitalizeCapitalize
????
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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.
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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
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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.