Accounting Standards & Conceptual Frameworks

Question 1

Objective of General Purpose Financial Reporting

Answer 1

Disclose the entities performance
Provide financial info about the reporting entity that is USEFUL to the PRIMARY USERS of general purpose financial reports in MAKING DECISIONS about providing resources to the reporting entity.

Question 2

Primary Users of General Purpose Financial reports (External)

Answer 2

Existing & Potential Investors
Lenders
Creditors

Question 3

Financial Information Needed

Answer 3

Info about:
The resources of the entity
The claims against the entity
Efficiency & Effectiveness w. wh. the entity’s mgmt.
& Board have discharged their responsibilities.

Question 4

SFAC #8 (Statements on Financial Acc. Concepts)
Conceptual Framework for Financial Reporting -
1) The Fundamental Qualitative Characteristics

Answer 4

Relevance and Faithful

Question 5

Relevance

Answer 5

Predictive of future outcomes
Confirming feedback about prior evaluations made
Materiality - entity specific threshold

Question 6

Faithful Representation (is reliable)

Answer 6

Completeness-includes descriptions & explanations.
Primary financial statements & notes.
Neutrality-free from bias
Free from Errors and ommissions

Question 7

2) Enhancing Qualitative Characteristics

“Compare & Verify in Time to Understand”

Answer 7

Comparability (and consistency)
Verifiability
Timeliness
Understandability

Question 8

3) The Cost Constraint

Answer 8

Benefit > Cost

i.e.-the benefit of reporting financial info must be greater than the cost of obtaining and presenting the info.

Question 9

SFAC #5

Recognition and Measurement in the Financial Stmts.

Answer 9

Full Set of Financials Include:
Statement of Financial Position (Balance Sheet)
Statement of Earnings (Income Statement)
Statement of Comprehensive Income
Statement of Cash Flow
Statement of Changes in Owner's Equity

Question 10

Measurements for Assets & Liabilties

Answer 10

Historical Cost-PP&E under US GAAP
Current Cost - Inventory (sometimes)
Net Realizable Value - (Gross a/r - allow for dbtful accts)
Curr Mkt Value - Marketable securities (GAAP & IFRS)
Present Val Future Cash Flows-LT Debt, Bonds issued

Question 11

Fundamental assumptions of US GAAP

Answer 11

Entity Assumption
Going Concern Assumption
Monetary Unit Assumption
Periodicity Assumption
Historical Cost Principle
Revenue Recognition Principle
Earned when what entity must do is substantially
complete
Realized or Realizable-Prod., Merch. or other assets
are exchanged for cash or claims to cash.
Matching Principle-expenses are matched to revenue for
the same period.
Full Disclosure-footnotes for completeness
Conservatism-use method least likely to overstate assets
(or revenues/gains) and understate liabilities
(and expenses/losses) in the current period.
Recognize revenue/gains when earnings process is
complete.
Recognize expenses/losses immediately.

Question 12

SFAC #6 - Elements of Financial Statements

“REGL ALE needs ID”

Answer 12

1) Comprehensive Income-Includes all differences between beginning equity & ending equity other than transactions with owners (net income + other comp. inc.)

Revenue
Expenses
Gains
Losses
Assets
Liabilities
Equity
Investments
Distributions