8BE - Intermediate Accounting (Kieso)

Question

 Identify which basic assumption of accounting is best described in each item below. 

a)The economic activities of FedEx Corporation are divided into 12-month   periods for the purpose of issuing annual reports. 

b)Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. 

c)Walgreen Co. reports current and non-current classifications in its balance sheet. 

d)The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.

Step-by-Step Solution

Answer

a) Periodicity assumption

b) Monetary unit assumption

c) Going concern assumption

d) Economic entity assumption

Step 1: Meaning of Accounting Assumptions:

The accounting assumptions are the set of rules based on which the business operations are conducted to ensure compliance with standards set by the FASB. 

Step 2: Explanation for statement (a)

• The periodicity assumption will be the correct answer for the given statement. 

• It states that the entity's activities need to be broken into different time frames for measuring the activities of the business. E.g. 12 months period is used for issuing annual reports.

Step 3: Explanation for statement (b)

• The monetary unit assumption will be the correct answer for the given statement.

• It states that the monetary unit is the most suitable basis for reporting the economic activities of the business entity. E.g. the US dollar rates are relatively stable; thus, the figures are not adjusted for inflation while reporting in the US.

 

Step 4: Explanation for statement (c)

• The going concern assumption will be the correct answer for the given statement.

• It states that the entity will continue its business for an unforeseeable future. Thus, the entity classifies its assets between current and non-current.

Step 5: Explanation for statement (d)

• The correct answer for the given statement will be the economic entity assumption.

• It states that the economic activities of the business should be associated with a specific unit for establishing its accountability. For E.g. the economic activities of the entire group are reported since it forms a separate economic unit.