Ch 2 Flashcards
Conceptual framework
Establishes the concepts that underlie financial reporting.
Why do we need a conceptual framework?
To be useful, rule making should build in and relate to an established body of concepts.
The profession should be able to more quickly solve new and emerging practical problems by referring to an existing framework of basic theory.
Framework should do what?
Increase financial statement users understanding of and confidence in financial reporting
The conceptual framework was developed by whom?
FASB
The conceptual framework would be a basis for setting what?
Accounting rules and for resolving financial reporting controversies.
NO. 1 is
Objectives of financial reporting by business enterprises
Which presents the goals and purposes of accounting.
No. 2
Qualitative characteristics of accounting information
Examines the characteristics that make accounting information useful
No. 3
Elements of financial statements of business enterprises
Provides definitions of items in financial statements such as assets liabilities revenues and expenses.
No. 5
Recognition and measurement in financial statements of business enterprises
Sets forth fundamental recognition and measurement criteria and guidance in what info should be formally incorporated into financial statements and when.
No. 6
Elements of financial statements
Replaces no. 3 and expands its scope to include not for profit organizations
No. 7
Using cash flow info and present value in accounting measurements
Provides a framework for using expected future cash flows and present values as a basis for measurement
No. 8
Chapter 1 “objectives of financial reporting by business enterprises
Chapter 3 “qualitative characteristics of useful financial information”
Replaces no. 1 and no. 2
First level of the framework is
Objective of financial reporting which is the foundation of conceptual framework
The objective of general purpose financial reporting is to provide
Info about reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions about providing resources to entity.
General purpose financial reporting
Helps users who lack the ability to demand all the financial information they need from an entity and therefore must rely at least partly on the information provided in financial reports.
The second level of framework is
Conceptual building blocks that explain qualitative characteristics of accounting info
How does a company choose an acceptable accounting method, the amount and types of info to disclose and the format in which to present it?
By determine which alternative provides the most useful info for decision making purposes
FASB identified qualitative characteristics of account information that?
Distinguish better (more useful) information from inferior (less useful) info for decision making purposes.
Fundamental quality : faithful representation
What are the ingredients of the fundamental quality?
Completeness
Neutrality
Free from error
Faithful representation
The numbers and descriptions match what really existed or happened.
Completeness
Means that all info that is necessary for faithful representation is provided.
Any omissions can cause info to be false or misleading and not helpful to users.
Neutrality
Means that the company cannot select info to favor one set of interested parties over the other.
Free from error
A info that is free from error will be a more accurate (faithful) representation of financial item.
Faithful representation does not imply what?
Total freedom from error.
Fundamental quality: relevance
Ingredients of fundamental quality
Predictive value
Confirmatory value
Materiality
Relevance
Acct info must be capable of making a difference in a decision.
Predictive value
Financial info has predictive value if it has value as input to predictive processes used by investors to form their own expectations about future.
Confirmatory value
Relevant info also helps users confirm or correct prior expectations
Materiality
Is a company specific aspect of relevance.
When is info material?
If ommiting it or misstating it could influence decisions that users make on the basis of reported financial info.
Why does a company determine whether information is material?
Bc both the nature and or magnitude of the items to which the info relates must be considered in context of individual company’s financial report
When is info immaterial?
If it would to have no impact on a decision maker.
IRRELEVANT
IT MIST MAKE A DIFFERENCE ROR A COMPANY NEED TO NOT REPORT IT.
Why is materiality one of the most challenging aspects of accounting?
It requires evaluating both relative size and importance of each item.
When determining a item is material what must be considered?
Qualitative and quantitative factors
What are the enhancing qualities of relevance
Comparability
Verifiability
Comparability
Enables users to identify real similarities and differences in economic events between companies.
Info that is measured and reported in a similar manner for diff companies is considered what?
Comparable
What is another type of comparability?
Consistency,
Which is present when a company applies the same accounting treatment to similar events from period to period.
Variability
Occurs when independent measures using the same methods obtain similar results
Variability occurs in 2 situations
Direct verification
– verification of an amount for an asset therefore can occur by simply counting inventory.
Indirect verification
– verification may occur by checking inputs (quantity and costs) and recalculating the outputs (EI value) using the same accounting convention or methodology
What are the two enhancing qualities for faithful representation?
Timeliness
Understandability
Timeliness
Means having info available to decision makers before it loses its capacity to influence decisions.
If there is a lack of timeliness
Then it can rob info of its usefulness.
Understandability
Quality of info that lets reasonably informed users see it’s significance.
When is understability enhanced?
When it is classified , characterized and presented clearly and concisely.
FASB classified elements into 2 distinct groups
Assets, liabilities and equity is
The other 7 elements describe what
A, L, E = Describing amounts of resources and claims to resources at a moment in time.
Other 7 = Transactions events and circumstances that affect a company during a period of time .
Assets
Probably future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Liabilities s
Probable future sacrifices of economic benefits arising from present obligations of s particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
Equity
Residual interest in assets of an entity that remains after deducting its liabilities.
In business enterprise the equity is the ownership interest.
Investments by owner s
Increases in net assets of a particular enterprise resulting transfers to it from other entities of something of value to obtain or increase ownership interest or equity in it.
Assets are more commonly received as investments by lenders but that which is recorded may also include devices or satisfaction or conversion of liabilities of enterprise.
Comprehensive income
Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources.
J
It includes all changes in equity during a period except those resulting from investment shy owners and distributions to owners.
Revenues
Inflows or enhancements of assets of an entity or settlement of its liabilities (or combo of both) during period from delivering or producing goods rendering services or other scitivities that constitutive the equity ongoing major or central operations
Expenses
Outflows or the using up of assets or incurrence of liabilities (or combo of both) during period from delivering or producing goods rendering services or carrying out other acitivites that constitute the entity’s ongoing major or central operations
Gains
Increase in equity (net assets) from transactions
Losses
Decrease in equity (net assets) from transactions
What is the 3rd level of framework?
Concepts that implant the basic objective of level 1.
Recognition and measurement concept
I
What do the concepts explain
How companies should recognize measure and report financial elements and events.
What are the 4 basic assumptions that underlie the financial accounting structure
Economic entity
Going concern
Monetary unit
Periodicity
Economic entity
Means that economic activity can be identified with a particular unit of accountability .
Company keeps activity separate and distinct from its owners and any other business unit.
Going concern
Assumption that the company will have a long life.
Under liquidation approach
Company would better state asset values at net realizable value than at acquisition cost.
The going concern applies in most business when only
Where liquidation appears imminent is the assumption inapplicable
Monetary unit
Means that money is the common denominator of economic activity and provides appropriate basis for accounting measurement and analysis.
The monetary unit is
Relevance simply understandable and useful.
In US, accounting ignore price level changes and assumes the unit of measure the dollar to remain as what?
Reasonably Stable
Periodicity
Implies that a company can divide its economic activities into artificial time periods.
The time periods vary from monthly quarterly and yearly.
It is more difficult to determine proper net income when?
The time period is shorter
4 basic principles of accounting
Measurement
Revenue
Expense
Full disclosure
Most commonly used measurements are based on what?
Historical cost
Fair value
Historical cost
Is where GAAP requires that companies account for and report many assets and liabilities on the basis of acquisition price
Historical cost is generally thought to be what?
Verifiable
Fair value
Is defined as the price that would be received to sell an asset or paid to tender a liability in an orderly transaction between market participants at measurement date.
Fair value is what type of measure
Market based measure
Fair value principle
Is where GAAP has called for use of fair value measurements in financial statements
Fair value measures or estimates often provide more relevant information about?
Expected future cash flows related to asset or liability.
What is used as the basis for measurement of financial assets and liabilities?
Fair value option
Revenue recognition
Requires company recognize revenue in accounting period in which the performance obligation is satisfied
What is performance obligation
When a company agrees to perform a service or sell a product to a customer
Expense recognition
Let the expenses follow the revenues
Matching expenses (efforts) with revenues (accomplishments)
Two types of costa and what are they?
Product: such as material, labor and overhead attached to product
Period: such as officers salaries and other administrative expenses attach to period
Full disclosure
It recognizes the nature and amount of info included in fisncnsil reports reflects a series of judgements trade offs
Trade offs strive for
- Sufficient detail to disclose matters that make a difference to users
- Sufficient condensation to make info understandable keep in mind costs of preparing and using it.
Where do users find info about financial position, cash flows and investments?
Within main body of financial statements
In the notes to those statements
As supplementary information
Notes to financial statements
Amply or explain the items presented in main body of statements
Supplementary info
May include details or amounts that present a different perspective from that adopted in financial statements
Cost constraint
In providing info with qualitative characteristics that make it useful companies must consider the overriding fact that limits reporting
What is the difficulty in cost benefit analysis?
The costs especially benefits are not always evident or measurable.
He costs are several kinds
Costs of collecting and processing Of disseminating Of auditing Of potential litigation Of disclosure to competitors Of analysis and interpretation
