Ch 11 Financial Reporting Concepts

Question 1

accrual basis of accounting

Answer 1

The method of accounting where revenues are recorded in the period when the transaction occurs and not when cash is received or paid. (p. 592)

Question 2

comparability

Answer 2

An enhancing qualitative characteristic that financial information has if it can be compared with the financial information of other companies because the companies all use the same accounting principles. (p. 589)

Question 3

complete

Answer 3

The characteristic of financial information when it provides all information necessary to show the economic reality of the transactions. Completeness is part of the faithful representation fundamental qualitative characteristic of financial information. (p. 588)

Question 4

conceptual framework of accounting

Answer 4

A coherent system of interrelated elements that guides the development and application of accounting principles: it includes the objective of financial reporting, elements of financial statements, qualitative characteristics of financial information, recognition and measurement criteria, and foundational concepts, assumptions and constraints. (p. 584)

Question 5

consistency

Answer 5

The use of the same accounting policies from year to year. Consistency is part of the comparability enhancing qualitative characteristic of financial information. (p. 589)

Question 6

contract

Answer 6

An agreement between two or more parties that creates enforceable rights and obligations. (p. 594)

Question 7

cost constraint

Answer 7

The constraint that the costs of obtaining and providing information should not be more than the benefits that are gained. (p. 608)

Question 8

current cost

Answer 8

A measurement method that measures an asset at the amount of cash or equivalent that would have to be paid if the same or an equivalent asset had to be purchased in the current period. This is sometimes referred to as “replacement cost.” Liabilities measured at current cost reflect the amount required to settle an obligation currently. (p. 603)

Question 9

elements of financial statements

Answer 9

The basic categories in financial statements:
assets
liabilities
equity
revenue
expenses

(p. 586)

Question 10

expense recognition criteria

Answer 10

The criteria that state that expenses should be recognized when there is a decrease in an asset or increase in a liability, excluding transactions with owners that result in a decrease in owners’ equity. (p. 602)

Question 11

faithful representation

Answer 11

A fundamental qualitative characteristic of financial information that shows the economic reality of a transaction and not just its legal form. (p. 588)

Question 12

full disclosure

Answer 12

The accounting concept that recognizes that financial statement information must be complete and requires the disclosure of circumstances and events that make a difference to financial statement users. (p. 607)

Question 13

going concern assumption

Answer 13

The assumption that the company will continue operating for the foreseeable future, that is, long enough to meet its current objectives and carry out its current commitments. (p. 607)

Question 14

historical cost

Answer 14

An accounting concept that states that assets should be recorded at their historical (original) cost. (p. 603)

Question 15

material error

Answer 15

An error in the financial information that could impact an investor’s or creditor’s decision. (p. 589)

Question 16

materiality

Answer 16

An important concept of relevance in which an items is considered material if it is likely to influence the decision of reasonably careful investor or creditor. (p. 588)

Question 17

neutral

Answer 17

The characteristic of financial information when it is free from bias that is intended to attain a predetermined result or to encourage a particular behaviour. Neutrality is part of the faithful representation fundamental qualitative characteristic of financial information. (p. 588)

Question 18

objective of financial reporting

Answer 18

The goal of providing useful information for investors and creditors in making decisions in their capacity as capital providers. (p. 585)

Question 19

performance obligation

Answer 19

In a contract with a customer, this is an obligation to provide goods or services to another party. (p. 594)

Question 20

present value

Answer 20

A measurement method that measures assets and liabilities at the present value of future cash inflows or outflows. (p. 603)

Question 21

prudence

Answer 21

Guidance expected to be included in the revised conceptual framework to exercise caution in situations of uncertainty. Prudence is closely related to neutrality. (p. 588)

Question 22

realizable value

Answer 22

A measurement method that measures assets at the amount of cash or equivalent that could currently be obtained by selling the asset in an orderly disposal. Liabilities measured at realizable value report the cash expected to be paid to satisfy the liabilities in the normal course of business. Realizable value also encompasses fair value. (p. 603)

Question 23

relevance

Answer 23

A fundamental qualitative characteristic that financial information has if it makes a difference in a decision. The information should have predictive and feedback value and be material. (p. 588)

Question 24

reporting entity concept

Answer 24

This foundation concept requires that the accounting for a reporting entity’s activities be kept separate and distinct from the accounting for the activities of its owner and all other reporting entities. (p. 606)

Question 25

revenue recognition criteria

Answer 25

The criteria that state that revenue should be recognized when there is an increase in assets or decrease in liabilities from profit-generating activities. (p. 593)

Question 26

stand-alone selling price

Answer 26

The fair value of what a good or service would sell for on its own. (p. 594)

Question 27

stewardship

Answer 27

The ability of management to acquire and use a company’s resources in the best possible way. (p. 586)

Question 28

timeliness

Answer 28

An enhancing qualitative characteristic that financial information has if it is provided when it is still highly useful to decision makers. (p. 589)

Question 29

transaction price

Answer 29

The amount a business expects to receive in exchange for the goods and services promised to the other party. (p. 594)

Question 30

understandability

Answer 30

An enhancing qualitative characteristic of financial information that enables reasonably informed users to interpret and comprehend the meaning of the information provided in the financial statements. Understandability is greater when the information is classified, characterized, and presented clearly and concisely. (p. 590)

Question 31

verifiability

Answer 31

An enhancing qualitative characteristic of financial information that assures users that the information shows the economic reality of the transaction. (p. 589)