Book 1 - Chapter 18

10.

The three elements of the operating guidelines in accounting are:

•	GAAP (broad and specific): GAAP means the rules and guidelines that accountants must follow when recording transactions and preparing financial statements.
•	Modifying constraints on GAAP: Modifying constraints are rules that ensure that GAAP is applied in a way that does not result in meaningless distinctions or foolish results.
•	Underlying assumptions upon which GAAP and the constraints are based: Underlying assumptions are essential conditions that must exist before GAAP can be applied. Without these conditions, accounting as we know it could not exist.

11.

Full disclosure means disclosing all information that is necessary for users of financial
statements to fully understand the statements. This is important because different specific
GAAP methods and calculations may give different outcomes. The user must know how GAAP
rules are being applied. As well, knowing the timing of events reported on financial statements
can be essential in the correct interpretation of the statements. Finally, the disclosure of unusual
or non-recurring items is important. Both the financial statements and the financial statement
footnotes provide these types of disclosure.

12.

Underlying assumptions are the essential conditions that must exist before GAAP can be
applied. Without these conditions, accounting as we know it could not exist. Examples of
underlying assumptions are:

•	The economic entity can be identified. (For whom is the accounting being done?)
•	Transactions are measured in money value.
•	The value of the money remains stable.
•	The life of the entity is divided into time periods. (Financial reporting relates to each time period.)
•	The entity is a going concern. (The entity will continue to operate in the foreseeable future.)

Learning Goal 18, continued

SOLUTIONS

Learning Goal 18: Describe the Conceptual Framework of Accounting

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