ch 1 accuity vocab Flashcards
Objective
Provide useful financial information to help external parties decide whether or not to give a company money
Constraint: Cost
The benefit of providing information to shareholders must outweigh the cost to obtain that information
Pervasive criterion: Decision-Usefulness
Does this action/information enhance investors ability to make
educated decisions?
Fundamental Quality: Relevance
considered relevant when it is material and has predictive and/or confirmatory value
Ingredient: Materiality
Information is considered material if it would have an impact on a decisionmaker.
Ingredient: Predictive Value
Information has predictive value if it helps users form expectations about the future.
Ingredient: Confirmatory Value
Informaton has confirmatory value if it helps users confirm or correct prior expectations.
Fundamental Quality: Faithful Representation
The financial statements match what actually happened.
Ingredient: Completeness
All information necessary for faithful representation is provided.
Ingredient: Neutrality
A company cannot select information to favor one set of interested parties over another
Ingredient: Free From Error
For financial statements to be an accurate representation of a company, they must be free from (material) error.
Enhancing Quality: Comparability
Users should be able to compare financial information between different companies in the same industry
Enhancing Quality: Verifiability
Independent measures (auditors) obtain similar results to the the company, using the same accounting methods.
Enhancing Quality: Timeliness
Information is available to users before it loses its capacity to influence decisions.
Enhancing Quality: Understandability
Someone with a reasonable business
knowledge can understand the information presented
Basic Assumption: Economic Entity
A company keeps its activities clearly seperate from its owners and any other business units.
Basic Assumption: Going Concern
Assumes that the company will have a long life and business will continue as usual.
Basic Assumption: Monetary Unit
The currency that the company uses (i.e. the US dollar), is relevant, simple, universally available, understandable, and useful
Basic Assumption: Periodicity
Implies that a company can divide its activities into time periods
Historical Cost Principle
- The original price paid for the asset/liability
- Provides a verifiable benchmark for recording historical trends
- Assets such as Property, Plant, & Equipment are typically recorded at historical cost
Fair Value Principle:
- Essentially what you could get for an asset/liability if you sold it.
- Market-based measure, not easily verifiable.
- Assets such as stock market investments are typically recorded at historical cost
Basic Principle: Full Disclosure
Include enough detail to disclose matters that will make a difference to users
Condense (summarize) the information enough to make it understandable, while also keeping in mind the cost of doing so
Basic Principle: Revenue Recognition
Recognize revenue when the Goods are delivered to the buyer and Services are performed for the customer
Basic Principle: Expense Recognition
Recognize expenses when revenue is recognized
Recognize expenses in the period they are incurred (work is performed or service used).
