Ch 2 Flashcards
4 objectives of conceptual framework?
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
Conceptual Framework
Establishes concepts that underlie financial reporting
Coherent system of concepts that flow from an objective
Why we need conceptual framework?
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
FASB 3 level framework for financial reporting?
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
First Level: Objective of general purpose financial reporting?
Report to present and potential equity investors, lenders,
And other creditors in making decisions about providing
Resources to entity
Purpose of second level of financial accounting framework?
Form a bridge btw why of accounting (objective) and
The how of accounting (recognition, measurement,
Financial statement presentation)
Qualitative characteristics of financial accounting?
Each qualitative characteristic contributes to
decision usefulness of financial reporting info
Either fundamental or enhancing
Fundamental Quality: Relevance, 3 ingredients?
Ability to make a difference in a decision
1 predictive value, 2 confirmatory value, 3 materiality
Predictive value?
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
Confirmatory value
Issuing financial statements confirms the current value
Of the company
Materiality, rule of thumb about whether immaterial?
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
Fundamental Quality: Faithful Representation, 3 ingredients?
Numbers and descriptions match what really existed
And happened
1 completeness, 2 neutrality, 3 free from error
4 enhancing qualities?
Comparability,
Verifiability,
timeliness,
understandability
Enhancing qualities define?
These characteristics distinguish more useful info
From less useful info
Comparability
Enables users to identify real similarities and
Differences in economic events between companies
Consistency
When company applies the same accounting treatment
To similar events from period to period
Verifiability
Occurs when independent measures, using the same
Methods obtain similar results
Timeliness
Having info available to decision makers before it loses
It’s capacity to influence decisions
Understandability
Quality of info that lets reasonably informed users
See its significance
Understandability is enhanced when info is classified,
Characterized, presented clearly and precisely
Basic elements of financial statements
10 interrelated elements that directly relate to measuring
Performance and financial status of a business enterprise
First three elements from a moment in time?
Assets, liabilities, equity are resources and claims to
Resources at a moment in time
Elements that describe a period in time?
Describe events, transactions and circumstances that
Affect a company during a period in time
4 basic assumptions of financial accounting?
1 economic entity
2 going concern
3 monetary unit
4 periodicity
Economic entity assumption
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
Going concern assumption
The company will have a long life
Monetary unit assumption
Money provides appropriate basis for measurement and analysis
Periodicity
Financial reporting in artificial time periods
Ex. Quarterly, annually
The quicker the company releases financial information…
The more likely it has errors and is inaccurate
4 basic principles of accounting?
1 measurement
2 revenue recognition
3 expense recognition
4 full disclosure
Historical cost principle
Assets and liabilities recorded at acquisition prices
Historical cost is Verifiable benchmark for measuring
Historical trends
Fair value
Price that would be received to sell an asset or paid
To transfer a liability in the current market to date
Fair value principle
Use of fair value measurements in financial statements
Fair value option
Option of measuring assets at fair value on financial
Statements
Performance obligation
When company agrees to perform a service or
Sell a product to a customer
Revenue recognition principle
Requires companies recognize revenue in accounting
Period when performance obligation is satisfied
Expense recognition principle
Implemented by matching efforts (expenses) with
Accomplishments (revenues)
Product costs
Material, labor, overhead attach to product
Period costs
Officer’s salaries, other administrative expenses attach
To period
Product costs: relationship? Recognition?
Direct relationships btw cost and revenue
Recognized in period of revenue (matching)
Period costs: relationship? Recognition?
No direct relationship btw cost and revenue
Expenses as incurred
Full disclosure principle
Sufficient detail to disclose matters that make a difference
To users
Sufficient condensation to make the info understandable
Supplementary information
May include details or amounts that present different
perspective from that adopted in financial statements
Notes to financial statements
Amplify info presented in main body of statements
Pro forms earnings
Exaggerates positive earnings number, hiding
True profitability of company
Cost constraint AKA Cost benefit relationship
Companies must weigh costs of providing info
Against the benefits that can be derived from using it
6 common costs in cost benefit analysis?
1Costs of collecting and processing 2 disseminating 3 auditing 4 potential litigation 5 disclosure to competitors 6 analysis and interpretation
2 common Benefits to preparers of cost benefit analysis?
Management control, access to capital at lower cost
3 Common benefits to users of cost benefit analysis?
1 better info allocation
2 tax assessment
3 rate regulation
