007 Constraints and Present Value

Question 1

Define cost effectiveness.

Answer 1

This constraint on Generally Accepted Accounting Principles (GAAP) limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 2

What is the constraints to setting accounting standards?

Answer 2

Cost effectiveness (or cost-benefit).

Question 3

What is Cost Effectiveness?

Answer 3

This constraint on Generally Accepted Accounting Principles (GAAP) limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 4

What is Conservatism?

Answer 4

Conservatism (also called prudence) is the reporting of less optimistic amounts (lower income, net assets) under conditions of uncertainty or when Generally Accepted Accounting Principles (GAAP) provides a choice from among recognition or measurement methods.

Question 5

List the elements included in a full set of financial statements.

Answer 5

(1) Balance sheet, (2) Income statement, (3) Statement of comprehensive income, (4) Statement of cash flows, (5) Statement of owner’s equity.

Question 6

What are the four criteria that must be met to be recognized and measured in a financial report?

Answer 6

1. Definition, 2. Measurability, 3. Relevance, 4. Reliability.

Question 7

What does a fresh start measurement do?

Answer 7

Establishes a new carrying value after an initial recognition and is unrelated to previous amounts (e.g., mark-to-market accounting and recognition of asset impairments).

Question 8

List the elements which a present value measurement that fully captures economic differences should include.

Answer 8

(1) An estimate of future cash flows, (2) Expectations about variations in amount or timing of those cash flows, (3) Time value of money as measured by the risk-free rate of interest, (4) The price for bearing the uncertainty inherent in the asset or liability, (5) Any other relevant factors.