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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

Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service

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Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne’s supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice.Instructions

(a) Help Wayne recognize the purpose of and benefit of a conceptual framework.

(b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background.

The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective and fundamentals that will be the basis for developing financial accounting and reporting standards. The objective identifies the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties.

The purpose of the statement on qualitative characteristics is to examine the characteristics that make accounting information useful. These characteristics or qualities of information are the ingredients that make information useful and the qualities to be sought when accounting choices are made.

Instructions

(a) Identify and discuss the benefits that can be expected to be derived from the FASB’s conceptual framework.

(b) What is the most important quality for accounting information as identified in the conceptual framework? Explain why it is the most important.

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