1.2 The Objective of General Purpose Financial Reporting

Question 1

What are Statements of Financial Accounting Concepts (SFACs)?

Answer 1

Concepts intended to guide the development and application of US GAAP

Question 2

Are SFACs authoritative or included in the ASC?

Answer 2

No they are not authoritative and are not included in the ASC

Question 3

Why do we create or put out financial accounting information? What is the objective of financial reporting?

Answer 3

report useful information to both current and potential investors and creditors in making decisions

Question 4

What 2 fundamental qualitative characteristics must financial information have in order to be considered useful information?

Answer 4

• relevance

- faithful represenation

Question 5

What are economic resources?

Answer 5

assets

Question 6

Define “claims to economic resources”

Answer 6

liabilities & equity or investor or issuer of debt

Question 7

Who are the primary users of financial information?

Answer 7

current / potential investors and creditors who cannot obtain it directly

Question 8

Is management considered a primary user of financial information?

Answer 8

No

Question 9

Primary users decisions depend on expected returns. Primary users need to assess what 3 things to help them evaluate their expected return.

Answer 9

amount, timing and uncertainty of the entity’s future net cash inflows

Question 10

Why are primary users unable to obtain all necessary information solely from general-purpose financial reports?

Answer 10

• insufficient to determine the value of the entity

- based significantly on estimates, judgments, and models

Question 11

What information is reported about the entity in financial reporting?

Answer 11

the entities economic resources and claims to them (financial position or BS) and to changes in those resources and claims (financial performance or P&L)

Question 12

What is the purpose of obtaining information about economic resources and claims of an entity?

Answer 12

helps to evaluate liquidity, solvency, financing needs, and the probability of obtaining financing

Question 13

Changes in economic resources and claims to them may result from (2):

Answer 13

• the entity’s performance (earnings)

- other events and transactions (issuing debt & equity, etc.)

Question 14

How is information about financial performance useful? (3)

Answer 14

• understanding the return on economic resources, its variability, and its components
• evaluating management
• predicting future returns

Question 15

Define accrual basis accounting

Answer 15

reports the effects of transactions and other events and circumstances even if cash flow occurred in a different period

Question 16

How is the accrual basis of accounting useful to managers who need cost accounting or operating activity information?

Answer 16

it is not

Question 17

What is the preferred method of evaluating past and future performance?

Answer 17

accrual basis

Question 18

How is information about cash flows helpful?

Answer 18

• evaluating financing and investing activities, liquidity and solvency
• understanding operations
• interpreting other financial information
• assessing potential for future net cash inflows