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Chapter 2: Q14Q. (page 61)

What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?

Short Answer

Expert verified

The basic accounting problem created by the monetary unit assumption is that it does not account for the outcome of inflation or increase in price and the corresponding decrease in purchasing power of people. The FASB expects unadjusted dollar amounts to be used for determining items listed in financial statements.

Step by step solution

01

Meaning of Monetary Unit Assumption

The monetary unit assumption is also termed a money measurement concept. This assumption implies that only those business activities are noted in the accounting books which can be stated in cash. At the same time, non-monetary events like labor-management relations, sales policy, labor unrest, the effectiveness of competition, and so on, which are of vital importance to the business concern, do not find a place in accounting. This is because their effect is not estimable and quantifiable in terms of money.

02

Basic accounting problem created by the monetary unit assumption

The monetary unit assumption presumes that the measuring unit (the dollar) stays the same so that dollars of various years can be accumulated without any modification. When the dollar value changes significantly with time, the monetary unit assumption decreases its effectiveness.

03

FASB position on a stable monetary unit

The Financial Accounting Standards Board (FASB) in Concept No. 5 shows that it anticipates the dollar not adjusted for inflation or deflation to be used for the purpose of evaluating items identified in financial statements. Except if the situation changes considerably, will the Board account for the steadier unit of measurement.

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Most popular questions from this chapter

E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

  1. Fair value changes are not recognized in the accounting records.
  2. Financial information is presented so that investors will not be misled.
  3. Intangible assets are amortized over periods benefited.
  4. Agricultural companies use fair value for purposes of valuing crops.
  5. Each enterprise is kept as a unit distinct from its owner or owners.
  6. All significant post-balance-sheet events are disclosed.
  7. Revenue is recorded when the product is delivered.
  8. All important aspects of bond indentures are presented in financial statements.
  9. Rationale for accrual accounting.
  10. The use of consolidated statements is justified.
  11. Reporting must be done at defined time intervals.
  12. An allowance for doubtful accounts is established.
  13. Goodwill is recorded only at time of purchase.
  14. A company charges its sales commission costs to expense

Discuss whether the changes described in each of the cases below require recognition in the CPA鈥檚 audit report as to consistency. (Assume that the amounts are material).

  1. The company changed its inventory method to FIFO from weighted-average, which had been used in prior years.
  2. The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years.
  3. The estimated remaining useful life of plant property was reduced because of obsolescence.

Which of the following statements about the IASB and FASB conceptual frameworks is not correct?

(a) The IASB conceptual framework does not identify the element comprehensive income.

(b) The existing IASB and FASB conceptual frameworks are organized in similar ways.

(c) The FASB and IASB agree that the objective of financial reporting is to provide useful information to investors and creditors.

(d) IFRS does not allow use of fair value as a measurement basis.

Question: The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting.

  1. Business reporting should exclude information outside of management鈥檚 expertise or for which management is not the best source, such as information about competitors.

  2. Management should not be required to report information that would significantly harm the company鈥檚 competitive position.

  3. Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast themselves the company鈥檚 financial future.

  4. Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business.

  5. Companies should present certain elements of business reporting only if users and management agree they should be reported- a concept of flexible reporting.

  6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.

Instructions

For each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting.

What is meant by term 鈥渜ualitative characteristics of accounting information鈥�?
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