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Financial Acc Systems 1 > Ch 2 > Flashcards

Ch 2 Flashcards

0
Q

4 objectives of conceptual framework?

A

1 identify boundaries of financial reporting

2 selecting transactions, other events and circumstances
To be represented

3 how they should be recognized and measured

4 how they are summarized and reported

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1
Q

Conceptual Framework

A

Establishes concepts that underlie financial reporting

Coherent system of concepts that flow from an objective

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2
Q

Why we need conceptual framework?

A

1 rule making should build on established concepts

2 quickly solve new and emerging practical problems
By referring to an existing framework of basic theory

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3
Q

FASB 3 level framework for financial reporting?

A

Level 1 the purpose/objective of financial reporting

Level 2 qualitative characteristics that make accounting
Info useful and elements of financial statements (assets,
Liabilities, etc.)

Level 3 identifies recognition, measurement, disclosure
Concepts used in establishing/ applying accounting
Standards to specific concepts

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4
Q

First Level: Objective of general purpose financial reporting?

A

Report to present and potential equity investors, lenders,
And other creditors in making decisions about providing
Resources to entity

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5
Q

Purpose of second level of financial accounting framework?

A

Form a bridge btw why of accounting (objective) and
The how of accounting (recognition, measurement,
Financial statement presentation)

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6
Q

Qualitative characteristics of financial accounting?

A

Each qualitative characteristic contributes to
decision usefulness of financial reporting info

Either fundamental or enhancing

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7
Q

Fundamental Quality: Relevance, 3 ingredients?

A

Ability to make a difference in a decision

1 predictive value, 2 confirmatory value, 3 materiality

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8
Q

Predictive value?

A

Value as input to predictive processes used by investors
To form their own expectations about the future

Ex. Analyze UPS shares current resources, dividends
And earnings performance to predict company’s future earnings

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9
Q

Confirmatory value

A

Issuing financial statements confirms the current value

Of the company

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10
Q

Materiality, rule of thumb about whether immaterial?

A

Whether information is worth stating based on
It’s magnitude and context are relevant to financial decisions

Relative size of item determines materiality

Anything under 5 percent of net income is immaterial

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11
Q

Fundamental Quality: Faithful Representation, 3 ingredients?

A

Numbers and descriptions match what really existed
And happened

1 completeness, 2 neutrality, 3 free from error

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12
Q

4 enhancing qualities?

A

Comparability,
Verifiability,
timeliness,
understandability

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13
Q

Enhancing qualities define?

A

These characteristics distinguish more useful info

From less useful info

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14
Q

Comparability

A

Enables users to identify real similarities and

Differences in economic events between companies

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15
Q

Consistency

A

When company applies the same accounting treatment

To similar events from period to period

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16
Q

Verifiability

A

Occurs when independent measures, using the same

Methods obtain similar results

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17
Q

Timeliness

A

Having info available to decision makers before it loses

It’s capacity to influence decisions

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18
Q

Understandability

A

Quality of info that lets reasonably informed users
See its significance

Understandability is enhanced when info is classified,
Characterized, presented clearly and precisely

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19
Q

Basic elements of financial statements

A

10 interrelated elements that directly relate to measuring

Performance and financial status of a business enterprise

20
Q

First three elements from a moment in time?

A

Assets, liabilities, equity are resources and claims to

Resources at a moment in time

21
Q

Elements that describe a period in time?

A

Describe events, transactions and circumstances that

Affect a company during a period in time

22
Q

4 basic assumptions of financial accounting?

A

1 economic entity
2 going concern
3 monetary unit
4 periodicity

23
Q

Economic entity assumption

A

Economic activity can be identified with particular
Unit of accountability

Company keeps activity separate and distinct from
It’s owners and any other business unit

24
Q

Going concern assumption

A

The company will have a long life

25
Q

Monetary unit assumption

A

Money provides appropriate basis for measurement and analysis

26
Q

Periodicity

A

Financial reporting in artificial time periods

Ex. Quarterly, annually

27
Q

The quicker the company releases financial information…

A

The more likely it has errors and is inaccurate

28
Q

4 basic principles of accounting?

A

1 measurement
2 revenue recognition
3 expense recognition
4 full disclosure

29
Q

Historical cost principle

A

Assets and liabilities recorded at acquisition prices

Historical cost is Verifiable benchmark for measuring
Historical trends

30
Q

Fair value

A

Price that would be received to sell an asset or paid

To transfer a liability in the current market to date

31
Q

Fair value principle

A

Use of fair value measurements in financial statements

32
Q

Fair value option

A

Option of measuring assets at fair value on financial

Statements

33
Q

Performance obligation

A

When company agrees to perform a service or

Sell a product to a customer

34
Q

Revenue recognition principle

A

Requires companies recognize revenue in accounting

Period when performance obligation is satisfied

35
Q

Expense recognition principle

A

Implemented by matching efforts (expenses) with

Accomplishments (revenues)

36
Q

Product costs

A

Material, labor, overhead attach to product

37
Q

Period costs

A

Officer’s salaries, other administrative expenses attach

To period

38
Q

Product costs: relationship? Recognition?

A

Direct relationships btw cost and revenue

Recognized in period of revenue (matching)

39
Q

Period costs: relationship? Recognition?

A

No direct relationship btw cost and revenue

Expenses as incurred

40
Q

Full disclosure principle

A

Sufficient detail to disclose matters that make a difference
To users

Sufficient condensation to make the info understandable

41
Q

Supplementary information

A

May include details or amounts that present different

perspective from that adopted in financial statements

42
Q

Notes to financial statements

A

Amplify info presented in main body of statements

43
Q

Pro forms earnings

A

Exaggerates positive earnings number, hiding

True profitability of company

44
Q

Cost constraint AKA Cost benefit relationship

A

Companies must weigh costs of providing info

Against the benefits that can be derived from using it

45
Q

6 common costs in cost benefit analysis?

A 
1Costs of collecting and processing
2 disseminating
3 auditing
4 potential litigation
5 disclosure to competitors
6 analysis and interpretation
46
Q

2 common Benefits to preparers of cost benefit analysis?

A

Management control, access to capital at lower cost

47
Q

3 Common benefits to users of cost benefit analysis?

A

1 better info allocation
2 tax assessment
3 rate regulation

Financial Acc Systems 1 (22 decks)

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