CH 2 Flashcards
Define conceptual framework
a. A coherent system of concepts that flow from an objective
What does a soundly developed conceptual framework accomplish?
a. Enable FASB to issue useful and consistent pronouncements overtime
b. Solve problems by referring to existing framework of basic theory
What are four concepts of guidance for financial reporting
a. Identifying the boundaries of financial reporting
b. Selecting the transactions, other events, and circumstances of be represented
c. How they should be recognized and measured
d. How they should be summarized and reported
Why is “ standard setting” important for financial reporting
a. It will lead to different results from identical issues
b. It can be easy for users and creditors to compare results
What is first level of financial reporting
a. Objective of financial reporting
i. Purpose of financial reporting
What is second level of financial reporting
a. Qualitative characteristics
i. Accounting info is useful and user-friendly
What is third level of financial reporting
a. Recognition, measurement, and disclosure concepts
Define decision useful
a. Useful to present for creditors
Define qualitative characteristics
a. To distinguish from useful and inferior information
Define relevance
a. Capable of making difference in a decision
Define Predictive value
a. Predictive process to determine the future results
Define confirmatory value
a. Relevant information also helps users confirm or correct prior expectations
Define Materiality
a. Company specific aspect of relevance (must make a difference).
Does Materiality only depend on qualitative accounts?
a. No, both qualitative and quantitative accounts.
Define Faithful representation
a. Numbers and descriptions match what really existed or happened.
Define completeness
a. Information is necessary for faithful representation
Define neutrality
a. Company cannot select information to favor one set of interested parties
Define free from error
a. Financial item is precise
What characteristic distinguish from more useful to less.
a. Enhancing qualities
i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
Define comparability
a. Enables users to identify the real similarities and differences in economic events
b. Financial forms must be consistent
Define consistency
a. Present when a company applies the same accounting treatment to similar events from period to period
Can a company change accounting methods
a. Yes, it must improve accounting and demonstrate the purpose and nature of applying it.
Define Verifiability
a. Independent measures with same methods that results in similar results
Define timeliness
a. Having information available to decision makers before it loses its capacity to influence decisions.
Define Understandability
a. Quality of information that lets reasonably informed users see its significance
b. Information can be enhanced if classified, characterized, presented clearly, and concise.
Define moment in time
a. Resources and claim to resources
i. Assets
ii. Liabilities
iii. equity
Define Assets
a. Probable future economic benefits or controlled by a particular entity as a result of past transactions or events
Define liabilities
a. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
Define Equity
a. Residual interest in the assets of an entity that remains after deducting its liabilities.
Define period of time
a. Transactions
b. Events
c. Circumstances
Define investments by owners
a. Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests ( or equity) in an enterprise.
Define Distributions to owners
a. Decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners.
Define Comprehensive income
a. Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non-owner sources.
Define Revenue
a. Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Define Expenses
a. Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.
Define gains
a. Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.
Define Losses
a. Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.
What are the elements of financial statements
a. Assets
b. Liabilities
c. Equity
d. Investments by owners
e. Distributions to owners
f. Comprehensive income
g. Revenues
h. Expenses
i. Gains
j. Loss
What are four basic assumptions of financial accounting
a. Economic entity
b. Going concern
c. Monetary unit
d. Periodicity
Define economic entity assumption
a. Economic activity can be identified with a particular unit of accountability
Define Monetary Unit assumption
a. Money is the common denominator of economic activity and provides an appropriate an appropriate basis for accounting measurement and analysis.
b. Money is used to expressing interest in parties changes in capital and exchanges for good
Going Concern Assumption
a. Company will last long enough to fulfill their objectives and commitment
b. Except when liquidation appears imminent
Define periodicity assumption
a. Company can divide its economic activity into periods that may vary.
Does shorten time impact the equity of a company
a. Yes, it has negative effects that make it hard to apply economic measurements
What are the four basic principles of accounting
a. Measurement ( historical and fair value)
b. Revenue recognition
c. Expense recognition
d. Full disclosure
Define historical cost
a. An accepted accounting principle that companies account for and report most assets and liabilities on the basis of acquisition price.
What is the benefit of using historical cost
a. Verifiable benchmark for measuring historical trends for liabilities but it may be difficult for assts.
Define fair value
a. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Define fair value principle
a. GAAP has increasingly called for use of fair value measurements in the financial statements.
Define fair value option
a. The choice allowed by the FASB to use fair value in the financial statements as the basis of measurement for financial assets and liabilities. Under the fair value option, the item is recorded at fair value at each reporting date, and unrealized holding gains or losses are reported as part of net income.
Why does fair value more relevant than historical cost
a. it reflects the current cash equivalent value of financial instruments
Does fair value give better idea of a company’s financial health and cash inflows?
a. Yes, it reflects the cash equivalent value of financial instruments.
What does Fair value Hierarchy demonstrate?
a. Fair value, over time, can be subjective over a period of time.
b. Provides insight on valuation techniques that are used to determine fair value
Define revenue recognition principle
a. companies recognize revenue in the accounting period in which the performance obligation is satisfied. Generally, recognition at the time of sale provides a uniform and reasonable test.
b. Companies have a performance obligation
Identify five revenue recognition principle
a. Identify the contracts between with customer
b. Identify separate performance obligation in contract
c. Determine the transaction of price
d. Allocation the transaction price to separate performance obligations
e. Recognize the revenue when each performance has been satisfied.
Define expense recognition principle
a. the recognition of expenses is related to net changes in assets and earning revenues, that is, “let the expense follow the revenues.”
define Full disclosure principle
a. It recognizes that the nature and amount of information included in financial reports reflects a series of judgmental tradeoffs.
Does a “good disclosure” follow full disclosure principle?
a. No, it needs to have materiality
define Notes to financial statements
a. Amplify or explain the items presented in the main body of the statements.
b. It describes a narrative of accounting or financial practice
Supplementary information
a. May include details or amounts that present a different perceptive from that adopted in the financial statements.
b. Details could vary between low or high relevance and/or faithful representation
Define pro forma
a. Standard measures that companies adjust usually for one time or nonrecurring items
Define cost constraint
a. Companies weigh the cost of providing the information against the benefits that can be derived from using it.
