1. KHALID AZIZ 0322*3385752 The Measurement Fundamentals of Financial Accounting

2. KHALID AZIZ 0322*3385752 JOIN KHALID AZIZ n FRESH CLASSES n ICap module b & d n FINANCIAL ACCOUNTING, ECONOMICS & COST ACCOUNTING n INDIVIDUAL & GROUPS

3. KHALID AZIZ 0322*3385752 JOIN KHALID AZIZ n CRASH CLASSES OF MA- ECONOMICS-EXTERNAL n PREVIOUS..MICRO AND STATISTICS n IN JUST 15 DAYS

4. KHALID AZIZ 0322*3385752 JOIN KHALID AZIZ n ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. n FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. n COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. n CONTACT: n 0322-3385752 n 0312-2302870 n R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

5. KHALID AZIZ 0322*3385752 Key Points n Four basic assumptions of financial accounting. n The markets in which business entities operate and the valuation bases used on the balance sheet. n The principle of objectivity and how it determines the dollar values that appear on the financial statements. n The principles of matching, revenue recognition, and consistency. n Two exceptions to the principles of financial accounting measurement: materiality and conservatism.

6. KHALID AZIZ 0322*3385752 Basic Assumptions n Economic entity n Fiscal period n Going concern n Stable dollar

7. KHALID AZIZ 0322*3385752 Economic Entity n A company is assumed to be a separate economic entity that can be identified and measured. n This concept helps determine the scope of financial statements. n Examples — Disney and ABC, General Electric and NBC.

8. KHALID AZIZ 0322*3385752 Fiscal Period n It is assumed that the life of an economic entity can be broken down into accounting periods. n The result is a trade-off between objectivity and timeliness. n Alternative accounting periods include the calendar or fiscal year.

9. KHALID AZIZ 0322*3385752 Going Concern n The life of an economic entity is assumed to be indefinite. n Assets, defined as having future economic benefit, require this assumption.

10. KHALID AZIZ 0322*3385752 Stable Dollar n The value of the monetary unit used to measure an economic entity’s performance and position is assumed stable. n If true, the monetary unit must maintain constant purchasing power. n Inflation, however, changes the monetary unit’s purchasing power. n This is considered an unrealistic assumption and thus places a limit on the financial statements as a tool for analysis.

11. KHALID AZIZ 0322*3385752 Valuations on the Balance Sheet n Input market –Purchase of materials, labor, overhead n Output market –Sales of services or inventories n Alternative valuation bases –Present value –Fair market value –Replacement cost –Original cost

12. KHALID AZIZ 0322*3385752 Present Value as a Valuation Base n Discounted future cash inflows and outflows n For example, the present value of a notes receivable is calculated by determining the amount and timing of its future cash inflows and adjusting the dollar amounts for the time value of money.

13. KHALID AZIZ 0322*3385752 Fair Market Value as a Valuation Base n Sales price or the value of goods and services in the output market. n For example, accounts receivable are valued at net realizable value which approximates fair market value.

14. KHALID AZIZ 0322*3385752 Replacement Cost as a Valuation Base n Current cost or the current price paid in the input market. n For example, inventories are valued at original cost or replacement cost, whichever is lower.

15. KHALID AZIZ 0322*3385752 Original Cost as a Valuation Base n Input price paid when originally purchased. n For example, land and property used in a company’s operations are all valued at original cost.

16. KHALID AZIZ 0322*3385752 Principles of Financial Accounting Measurement n Objectivity n Matching n Revenue recognition n Consistency

17. KHALID AZIZ 0322*3385752 The Objectivity Principle n This principle requires that the values of transactions and the assets and liabilities created by them be verifiable and backed by documentation. n For example, present value is only used when future cash flows can be reasonably determined.

18. KHALID AZIZ 0322*3385752 The Revenue Recognition Principle n This principle determines when revenues can be recognized. n This principle triggers the matching principle, which is necessary for determining the measure of performance. n The most common point of revenue recognition is when goods or services are transferred or provided to the buyer.

19. KHALID AZIZ 0322*3385752 The Matching Principle n This principle states that the efforts of a given period should be matched against the benefits they generate. n For example, the cost of inventory is capitalized as an asset on the balance sheet and not recorded in Cost of Goods Sold until sold.

20. KHALID AZIZ 0322*3385752 The Matching Process Incur cost

21. KHALID AZIZ 0322*3385752 The Matching Process Incur cost Period revenue is generated?

22. KHALID AZIZ 0322*3385752 The Matching Process Incur cost Period revenue is generated? Expense Current period

23. KHALID AZIZ 0322*3385752 The Matching Process Incur cost Period revenue is generated? Expense Capitalize Future period

24. KHALID AZIZ 0322*3385752 The Matching Process Incur cost Period revenue is generated? Expense Capitalize ????

25. KHALID AZIZ 0322*3385752 The Consistency Principle n Generally accepted accounting principles allow a number of different, acceptable methods of accounting. n This principle states that companies should choose a set of methods and use them from one period to the next. n For example, a change in the method of accounting for inventory would violate the consistency principle.

26. KHALID AZIZ 0322*3385752 Exceptions to the Basic Principles n Materiality –Only transactions with amounts large enough to make a difference are considered material. –Nonmaterial transactions are ignored n Conservatism –When in doubt Understate assets Overstate liabilities Accelerate recognition of losses Delay recognition of gains

27. KHALID AZIZ 0322*3385752 JOIN KHALID AZIZ n ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. n FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. n COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. n CONTACT: n 0322-3385752 n 0312-2302870 n R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.