Question

P3. State the accounting assumption, principle, or constraint that is most applicable in the following cases. 1. All payments less than $25 are expensed as incurred. 2. The company employs the same inventory valuation method from period to period. 3. A patent is amortized as an expense over the periods benefited. 4. Assuming that dollars today will buy as much as ten years ago. 5. Financial statements are prepared each year. 6. All significant post-balance sheet events are reported. 7. Personal transactions of the proprietor are distinguished from business transactions.

Answer 1

1. Materiality : As pr materiality principle, all the information that is material for decision making, needs to be disclosed. When the payments less than $25 are expensed as incurred then it means that $25 is the material limit.

2. Consistency: As per consistency assumption, same methods must be followed year after year.

3. Matching principle: As per matching principle all the expenses must be recorded in a period in which the related revenue is earned. When patent is amortized over the periods benefitted the it is due to matching principle.

4. Historical cost concept: According to historical cost concept, an asset is recorded at the price paid to acquire it. Later on if there is any change in the price or dollar value, then it is not considered.

5. Period concept: As per the time period concept, financial statements are prepared for a time period.

6. Full disclosure: When all significant post balance sheet events are reported then it is due to full disclosure principle. According to full disclosure principle, all the material or significant information must be fully disclosed.

7. Entity concept: According to entity concept, business is a separate entity distinct from its owners or proprietors.