Ch 1 - FASB Conceptual Framework Flashcards
Level 1 :
“Why” Accounting?
Accounting provides useful information to investors and creditors to help them make business decisions
Level 2:
Primary Qualitative Characteristics of Financial Reporting
Provide Definitions
- Relevance: accounting info must be capable of making a difference in a decision
- Faithful representation: Numbers and descriptions must match what really existed and happened
What are the “ingredients” that compose the Relevance quality of Financial Reporting?
- Predictive Value
- Confirmatory Value
- Materiality
What are the “ingredients” that compose the Faithful Representation quality of Financial Reporting?
- Complete
- Neutral
- Free from error
Level 2:
Secondary Qualitative Characteristics of Financial Reporting
- Comparability
- Verifiability
- Timeliness
- Understandability
Level 2:
Elements of Financial Reporting (10)
- Assets
- Liabilites
- Equity
- Investment by owners
- Distribution to owners (dividends)
- Comprehensive Income
- Revenues
- Expenses
- Gains
- Losses
Level 3:
What is the 3rd Level of the
Conceptual Framework comprised of?
(Recognition, Measurement, and Disclosure Concepts)
- Assumptions
- Principles
- Constraints
Level 3:
What are the 4 basic assumptions of Financial Reporting?
Provide Definitions
- Economic Entity: company keeps its activity separate from its owners and other businesses
- Going Concern: company lasts long enough to fulfill objectives and commitments
- Monetary Unit: money is the common denominator
- Periodicity: company can divide its economic activity into time periods
Level 3:
What are the 4 basic principles of Financial Reporting?
- Revenue Recognition Principle: companies must recognize revenue in the accounting period in which the performance obligation is satisfied
- Expense Recognition Principle: “Let the expense follow the revenue”
- Measurement Principle: most commonly used measurements are based on historical cost and fair value
- Full Disclosure Principle: providing information of sufficient importance to influence the judgement and decisionus of an informed user
What is historical cost?
a commonly used measurement under the measurement principle that provides a reliable benchmark for measuring historical trends
What is fair value?
a commonly used measurement under the measurement principle where the information may be more recent and useful
Level 3:
What is the Cost Constraint?
cost of providing information must be weighed against the benefits that can be derived from using it
