GAAP, the Four Assumptions, and Measurement Principles
📜
GAAP
🧠
Meg Gets Time
💰
Cost / Value
🎯 Objective
Identify which assumption or measurement principle is
illustrated (or violated) by each scenario, and recognize the roles of FASB,
the SEC, the AICPA, and auditors. Use the "Meg Gets Time" mnemonic for the four
assumptions.
🎮 How to Play
A company scenario or a standards question appears.
The question tells you what kind of choice to make (assumption, principle, or
standards body).
Tap the correct answer from the choices shown.
Build a streak for bonus points — accuracy is what counts.
⭐ How stars work: more stars = a better result. 3 stars = no mistakes at all.
Show feedback on wrong answers
📚 GAAP, Assumptions & Measurement Principles
📜 What is GAAP?
Generally Accepted Accounting Principles — the common rulebook all
US companies follow when preparing financial statements, so investors can compare
Lumina Devices to Stonebrook Software to your local bakery on the same terms.
Outside the US, most countries use IFRS
(International Financial Reporting Standards) instead.
🏛️ Who Makes, Enforces and Checks the Rules? (tap to open)
FASB — Financial Accounting Standards Board. Writes US GAAP.
SEC — Securities & Exchange Commission. US government agency
that enforces reporting rules on public companies.
Auditors — independent accountants from outside the company.
They check the financial statements and report whether they follow US GAAP.
AICPA — American Institute of Certified Public Accountants.
Professional body for CPAs (ethics, exam, standards for the profession).
IASB — International Accounting Standards Board. Writes IFRS
used by most countries outside the US. (Background only — the questions in
this game are about US rules.)
🧠 The Four Assumptions — "Meg Gets Time" (tap to open)
M·E·G·T → Meg Gets Time
M — Monetary Unit: Only record things you can measure in money
(a stable currency). Employee morale doesn't get a journal entry.
E — Economic Entity: The business is separate from its owner.
The owner's personal grocery run isn't a business expense.
G — Going Concern: Assume the business will continue operating
long enough to use its assets and pay its debts.
T — Time Period (Periodicity): Chop the continuous life of a
business into reportable chunks — months, quarters, years.
💰 The Two Measurement Principles (tap to open)
Historical Cost: Record assets at the price you actually paid,
and keep them at that price on the books — even if market value changes.
Fair Value: For certain assets (like investment securities),
update the books to current market value each reporting period.
🏢 Company Examples (tap to open)
Riverbend Coffee publishes quarterly results → Time Period
assumption in action.
Bramble Printing still records its factory building at the price
it paid in 1994, even though similar buildings cost much more today →
Historical Cost principle.
Small bakery owner pays for personal groceries from the
business cash drawer → violates the Economic Entity assumption (business
and owner aren't the same wallet).
🌐 GAAP vs IFRS — A Quick Comparison (tap to open)
US companies report under GAAP; most of the rest of the world uses IFRS. The foundational concepts you just learned (the four assumptions and the two measurement principles) are shared by both frameworks — they diverge on specific rules.
Feature
US GAAP
IFRS
Who sets it
FASB (US)
IASB (international)
Philosophy
Rules-based — prescriptive, detailed
Principles-based — more judgment, flexibility
Inventory (LIFO)
LIFO allowed
LIFO prohibited
Long-term asset revaluation
Generally not allowed (historical cost)
Allowed (revaluation model permitted)
Lease & revenue rules
More prescriptive bright-line tests
More principles-based judgment
🌍 Company callout:Lumina Devices, a US company, files GAAP financials with the SEC; Clearwater Electronics, based outside the US, files IFRS financials with international regulators. Their disclosures differ on inventory and revaluation — but both apply the same four assumptions and recognize historical cost as a baseline measurement.
Bottom line: Same conceptual foundation, different rulebooks on the details. As more countries (Korea, Nepal, Jamaica, the EU, most of Asia) report under IFRS, accountants increasingly need to read both.
🎯 How to Spot a Violation
Ask: which assumption did the person break?
Mixing personal and business money? → Economic Entity.
Trying to record something that has no dollar value? → Monetary Unit.
Refusing to split the year into quarters? → Time Period.
Valuing assets as if shutting down tomorrow? → Going Concern.