Basic Assumptions Principles and Constraints

There are three main Accounting Assumptions that accountants should be comfortable with:

Monetary unit assumption – In accounting, money is the commonly exchanged and transactions should be expressed in monetary units.

Time period assumption – Events of a company can be divided into time periods. Information reports should be generated for different time periods.

Business entity assumption – a business is accounted for separately and apart from other entities.  Most business entities will take distinct forms.

Determinants of Operating Exposure

Operating Exposure is the overall effect of random changes in currency exchange rates on a company's competitive position in foreign and domestic markets.  Overall, the operating exposure is the extent to which the firm’s operating cash flows are affected by international currency exchange rates.

A company's operating exposure is determined by:

1. Market structure of the inputs and products: meaning how competitive or how monopolistic the international and domestic markets facing the firm are
2. The companies ability to adjust its markets, product mix, and  production schedule in response to changing currency exchange rates.