Page 220 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

and losses on the termination of swap agreements, prior to the original maturity, are deferred and amortized to
interest income or expense over the original term of the swaps. Gains and losses arising from interest rate futures,
forwards and option contracts, and foreign currency forward and option contracts are recognized in income or

expense as offsets of gains and losses resulting from the underlying hedged transactions. (Chapter 14)
Cash flows from interest rate and foreign exchange risk management activities are classified in the same
category as the cash flows from the related investment, borrowing or foreign exchange activity. (Chapter 16)
The Company classifies its derivative financial instruments as held or issued for purposes other than trading.
(Chapter 14)

Earnings per share
Earnings per share amounts are based upon the weighted average number of common and common equivalent
shares outstanding during the year. Common equivalent shares are excluded from the computation in periods in
which they have an antidilutive effect. (Chapter 13)
As you proceed through the remaining chapters, you can see the accounting theories introduced in this chapter
being applied. In Chapter 6, for instance, we discuss why sales revenue is recognized and recorded only after goods

have been delivered to the customer. So far, we have used service companies to illustrate accounting techniques.
Chapter 6 introduces merchandising operations. Merchandising companies, such as clothing stores, buy goods in
their finished form and sell them to customers.
Understanding the learning objectives

• The major underlying assumptions or concepts of accounting are (1) business entity, (2) going concern
(continuity), (3) money measurement, (4) stable dollar, (5) periodicity, and (6) accrual basis and periodicity.
• Other basic accounting concepts that affect the accounting for entities are (1) general-purpose financial
statements, (2) substance over form, (3) consistency, (4) double entry, and (5) articulation.
• The major principles include exchange-price (or cost), revenue recognition, matching, gain and loss
recognition, and full disclosure. Major exceptions to the realization principle include cash collection as point of
revenue recognition, installment basis of revenue recognition, and the percentage-of-completion method of
recognizing revenue on long-term construction projects.

• Modifying conventions include cost-benefit, materiality, and conservatism.
• The FASB has defined the objectives of financial reporting, qualitative characteristics of accounting
information, and elements of financial statements.
• Financial reporting objectives are the broad overriding goals sought by accountants engaging in financial
reporting.
• Qualitative characteristics are those that accounting information should possess to be useful in decision
making. The two primary qualitative characteristics are relevance and reliability. Another qualitative

characteristic is comparability.
• Pervasive constraints include cost-benefit analysis and materiality.
• The FASB has identified and defined the basic elements of financial statements.
• The FASB has also described revenue recognition criteria and provided guidance as to the timing and
nature of information to be included in financial statements.
• The summary of significant accounting policies aid users in interpreting the financial statements.

Accounting Principles: A Business Perspective 221 A Global Text