Ch 2 Flashcards
Objective of general purpose financial reporting?
To provide financial information about the reporting entity that is useful to users in making decisions about providing resources to the reporting entity, where those decisions relate to equity and debt instruments, or loans and other forms of credit.
On what depends buy/sell decisions?
Expectations about returns (dividend yield and price appreciation)
On what do expectations about returns depend?
On prospects for an entity’s future cash flows
Information required to assess entity’s future cash flow prospects? (3)
Entity’s:
- resources,
- claims on resources
- use of the resources by management and board
What are financial reports designed to show?
Financial reports are not designed to show the (fair) value of a reporting entity (book value is available); they provide information to help users estimate the (fair) value of the reporting entity
What does a good accounting standard do? (2)
Addresses all economic realities and provides for flexibility in accounting for different economic transactions
What components are accounting standards are developed around (3 components)
- Recognition
- Measurement
- Disclosure
Why are standards needed?
To achieve consistency despite the choices
available (judgment will be necessary & can vary among preparers)
What is necessary when choices exist?
Full disclosure
Possible methods to measure net income? (3)
- Cash Basis
- Modified Cash Basis
- Accrual Basis
What do standard-setting bodies do (eg accounting
Standards Board)?
Set the standards
What do Regulatory authorities do?
Recognize and enforce the standards
What do regulators often retain?
The legal authority to establish financial reporting standards in their jurisdictions and can overrule private sector standard-setting bodies
