Which underlying concepts serves as the basis for preparing the financial statement at regular intervals?

Other basic concepts

Other basic accounting concepts that affect accounting for entities are (1) general-purpose financial statements, (2) substance over form, (3) consistency, (4) double entry, and (5) articulation. We discuss these basic accounting concepts next.

Accountants prepare general-purpose financial statements at regular intervals to meet many of the information needs of external parties and top-level internal managers. In contrast, accountants can gather special-purpose financial information for a specific decision, usually on a one-time basis. For example, management may need specific information to decide whether to purchase a new computer system. Since special-purpose financial information must be specific, this information is best obtained from the detailed accounting records rather than from the financial statements.

In some business transactions, the economic substance of the transaction conflicts with its legal form. For example, a contract that is legally a lease may, in fact, be equivalent to a purchase. A company may have a three-year contract to lease (rent) an automobile at a stated monthly rental fee. At the end of the lease period, the company receives title to the auto after paying a nominal sum (say, USD 1). The economic substance of this transaction is a purchase rather than a lease of the auto. Thus, under the substance-over-form concept, the auto is an asset on the balance sheet and is depreciated instead of showing rent expense on the income statement. Accountants record a transaction's economic substance rather than its legal form.

Consistency generally requires that a company use the same accounting principles and reporting practices through time. This concept prohibits indiscriminate switching of accounting principles or methods, such as changing inventory methods every year. However, consistency does not prohibit a change in accounting principles if the information needs of financial statement users are better served by the change. When a company makes a change in accounting principles, it must make the following disclosures in the financial statements: (1) nature of the change; (2) reasons for the change; (3) effect of the change on current net income, if significant; and (4) cumulative effect of the change on past income.

Chapter 2 introduced the basic accounting concept of the double-entry method of recording transactions. Under the double-entry approach, every transaction has a two-sided effect on each party engaging in the transaction. Thus, to record a transaction, each party debits at least one account and credits at least one account. The total debits equal the total credits in each journal entry.

When learning how to prepare work sheets in Chapter 4, you learned that financial statements are fundamentally related and articulate (interact) with each other. For example, we carry the amount of net income from the income statement to the statement of retained earnings. Then we carry the ending balance on the statement of retained earnings to the balance sheet to bring total assets and total equities into balance.

In Exhibit 27 we summarize the underlying assumptions or concepts. The next section discusses the measurement process used in accounting.

1. The conceptual framework specifically mentions two underlying assumptions, namely

a. accrual and going concern
b. accrual and accounting entity
c. going concern and time period
d. time period and monetary unit

2. Which of the following terms best describes financial statements whose basis of accounting recognizes transactions and other events when they occur?

a. accrual basis of accounting
b. going concern basis of accounting
c. cash basis of accounting
d. invoice basis of accounting

3. The accrual basis of accounting is based primarily on

a. conservatism and revenue realization
b. conservatism and matching
c. consistency and matching
d. revenue realization and matching

4. Which of the following statements best describes the term going concern?

a. when current liabilities of an entity exceed current assets
b. the ability of the entity to continue in operation for the foreseeable future
c. the potential to contribute to the flow of cash and cash equivalents to the entity
d. the expenses of an entity exceed its income

5. Which of the following is not an implication of the going concern assumption?

a. the historical cost principle is credible
b. depreciation and amortization policies are justifiable and appropriate
c. the current and noncurrent classification of assets and liabilities is justifiable and significant
d. amortizing research and development costs over several periods is justifiable and appropriate

6.The relatively stable economic, political and social environment supports

a. conservatism
b. materiality
c. timeliness
d. going concern

7. The financial statements that are prepared for the entity are separate and distinct from the owners according to the

a. going concern principle
b. matching principle
c. economic entity assumption
d. accounting period assumption

8. Which underlying concept serves as the basis for preparing financial statements at regular intervals?

a. accounting entity
b. going concern
c. accounting period
d. stable monetary unit

9. Which of the following is not an important characteristic of the financial statements that accountants currently prepare?

a. the information in financial statements is expressed in units of money adjusted for changing purchasing power
b. financial statements articulate with one another because measuring financial position is related to measuring changes in financial position
c. the information in financial statements is summarized and classified to help meet users' needs
d. financial statements can be justified only if the benefits they provide exceed the costs

10. Which of the following statements is incorrect?

a. the accrual method, which builds directly on the revenue and matching principles, ignores the timing of cash receipts or payments in determining when to recognize revenue or expenses
b. in accordance with the unit of measure assumption, accountants normally revise the amounts to reflect the changing purchasing power of money due to inflation or deflation
c. in accordance with the going concern assumption, the life of an entity is presumed to be indefinite
d. accountants prepare financial statements at arbitrary points in time during and entity's lifetime in accordance with the accounting concept of accounting period

Answer:
1. a
2. a
3. d
4. b
5. d
6. d
7. c
8. c
9. a
10. b

"Questions are lifted from the following sources:

PHICPA, AICPA, AA,ACP,PAS, PFRS, IAS, IFRS

Which underlying concepts serves as the basis for preparing financial statements at regular interval?

What is the basis of preparation of the financial statements?

What is the most important concept as used in preparation of financial statements?

What are the 3 underlying assumptions of financial reporting?