0 Recognitions & measurements concepts It consists of concepts that implement the basic objectives level one These concepts explain how companies should recognize measure and report financial elements and events a) Basic assumption b) Basic principles of accounting c) Constraints A) Basic assumptions: there are basic assumptions underlie the financial accounting structure: Economic entity assumption فرض الوحدة االقتصادية Going concern assumption فرض االستمرارية Monetary unit assumption الوحدة النقدية Periodicity assumption الفترة الزمنية Economic entity assumption : Its mean that economic activity can be defined with a particular unit of accountability in the other words, the company keeps its activity separate منفصلة and distinct منعزلةfrom its owners and any other business unit Going concern assumption : Its means that company will have a long life, expecting companies to last long enough to fulfill تنتهيtheir objectives and commitments اهدافها Monetary unit assumption : Its mean that money is the common denominator العامل الشائعof economic activity and provides an appropriate basis قواعد مناسبةfor accounting measurement and analysis (The monetary unit is relevant, simple, universally available, understandable, and useful.) Periodicity assumption : Its means that company can divide its activities into artificial اصطناعيةtime periods The most common are monthly quarterly, and yearly The shorter the time period, the more difficult it is to determine the proper net income for period B) Basic principles of accounting 1) 2) 3) 4) Historical cost principle التكلفة التاريخية Revenue recognition principle ادراك االيردات Matching principle المقابلة Full disclosure principle االفصاح الشامل 1) Historical cost principle : Its means that companies account for and report most assets and liabilities on the basis of acquisition price, this is referred to as the historical cost principle Users prefer historical cost because it provides them a reliable benefit mark for measuring historical cost Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” 2) Revenue recognition principle It occurs when realize and when earned This referred to as revenue recognition principle A company realizes revenue when it exchanges products, merchandise or other assets for cash Revenue is considered earned when the company accomplishes what it must to be entitled to the benefits represented by revenues There are some expectations for revenues recognition: a) During production b) At end of production c) Upon receipt of cash 3) Expense Recognition principle : Let the expense follow the revenues Companies recognize expenses not when they pay wages or make a product, but when the work (service) or the product actually contributes to revenue N.B Cash basis : matching between revenue receipts and cash paid only neglecting revenues recognized and expenses incurred Accrual basis : matching between all revenues recognized and all expenses incurred to show what actually occurred 4) Full disclosure principle: Its means that companies follow the general practice of providing information that is of sufficient importance to influence the judgment decision of an informed user Constraints: There are four factors that limit the reporting: Cost benefit relationship Conservatism Cost benefit relationship Companies must weigh the costs of providing the information against the benefits that can be derived from using it The benefits perceived must exceed the cost Conservatism when in doubt it is better to understate than overstate net income and net assets if not doubt exits there is no need for this base Choose the lower of cost or market approach in valuating inventories H.W Match the qualitative characteristics below with the following statements Relevance Faithful representation Predictive value Confirmatory value Comparability Completeness Neutrality Timeliness a Quality of information that permits users to identify similarities in and differences between two sets of economic events b Having information available to users before it loses its capacity to influence decisions c Information about economic events that has value as an input to the processes used by capital providers to form their own expectations about the future d Information that is capable of making a difference in the decisions of users in their capacity as capital providers e Absence of bias intended to attain a predetermined result or to induce a particular behavior