Financial reporting should provide information that is:
* useful to present to potential investors and creditors and other users in making rational investment, credit, and other financial decisions
* helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts
* about economic resources, the claims to those resources, and the changes in them
* helpful for making financial decisions
* helpful in making long-term decisions
* helpful in improving the performance of the business
* useful in maintaining records
To achieve basic objectives and implement ...view middle of the document...
Thus there is a trend to use fair values. Most debts and securities are now reported at market values.
* Revenue recognition principle holds that companies may not record revenue until (1) it is realized or realizable and (2) when it is earned. The flow of cash does not have any bearing on the recognition of revenue. This is the essence of accrual basis accounting. Conversely, however, losses must be recognized when their occurrence becomes probable, whether or not it has actually occurred. This comports with the constraint of conservatism, yet brings it into conflict with the constraint of consistency, in that reflecting revenues/gains is inconsistent with the way in which losses are reflected.
* Matching principle. Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost of Goods Sold are good examples of application of this principle.
* Full Disclosure principle. Amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information
* Objectivity principle: the company financial statements provided by the accountants should be based on objective evidence.
* Materiality principle: the significance of an item should be considered when it is reported. An item is considered significant when it would affect the decision of a reasonable individual.
* Consistency principle: It means that the company uses the same accounting principles and methods from period to period.
* Conservatism principle: when choosing between two solutions, the one...