Exercise-3: Identification of accounting assumptions and principles

Learning objective:
This exercise illustrates the identification of assumptions and principles of accounting followed by the companies in recognizing their transactions and economic activities.

Consider the following eight independent items:

1. Iqra Corporation divides its economic activities into 12-month periods for the purpose of preparing its annual financial reports.
2. Rise Corporation does not adjust the amounts of its financial statement to account for general inflation.
3. Wilson Corporation presents current and noncurrent classifications for both assets and liabilities in its annual balance sheet.
4. GE Corporation merges its economic activities with those of its subsidiaries.
5. Dura Company presents revenue on its income statement when the performance obligation is fulfilled rather than when the cash is received.
6. Master Inc. decides to record depreciation on a piece of equipment for a 5-year period during which it is expected to help the company generate revenue.
7. Roberts Corporation discloses information regarding a couple of pending lawsuits in the notes to its financial statements.
8. Nelson Corporation reports a parcel of land on its balance sheet at the amount that was paid to purchase it many years ago, even though the current fair value of the land is much higher than the amount originally paid to acquire it.

Required: Identify which basic accounting assumption or principle of accounting has been followed in each of the above eight items.

Solution

The economic activities and/or transactions performed by the companies in the above items are justified by the following accounting assumptions and principles:

1. Time period or periodicity assumption
2. Monetary unit assumption
3. Going concern assumption
4. Economic entity assumption
5. Revenue recognition principle
6. Expense recognition principle
7. Full disclosure principle
8. Historical cost principle