Ch 2 Flashcards
Materiality
is a company-specific aspect of relevance. Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information
Conceptual Framework
First Level:
The “why” Purpose of Accounting
Objective of financial reporting
Conceptual Framework
Second Level:
Bridge Between 1 and 3 Levels
Qualitative Characteristics of accounting information
Elements of financial statements
Verifiability
Verifiability occurs when independent measurers, using the same methods, obtain similar results.
SFAC No. 8
“The Objective of General Purpose Financial Reporting,” and, “Qualitative Characteristics of Useful Financial Information,” replaces SFAC No. 1 and No. 2.
SFAC No. 6
“Elements of Financial Statements,” replaces SFAC No. 3 and expands its scope to include not-for-profit organizations.
Faithful Representation
is the second fundamental quality that makes accounting information useful for decision-making
Completeness
means that all the information that is necessary for faithful representation is provided. An omission can cause information to be false or misleading and thus not be helpful to the users of financial reports.
Neutrality
means that a company cannot select information to favor one set of interested parties over another. Unbiased information must be the overriding consideration.
Enhancing Qualities
comparability, verifiability, timeliness, and understandability
Timeliness
means having information available to decision-makers before it loses its capacity to influence decisions. Having relevant information available sooner can enhance its capacity to influence decisions. A lack of timeliness, on the other hand, can rob information of its usefulness.
SFAC No. 1
“Objectives of Financial Reporting by Business Enterprises,” presents the goals and purposes of accounting (superseded by SFAC No. 8)
Confirmatory Value
Relevant information that helps users confirm or correct prior expectations
___________ means that the numbers and descriptions match what really existed or happened.
Faithful Representation
Understandability
is the quality of information that lets reasonably informed users see its significance. Understandability is enhanced when information is classified, characterized, and presented clearly and concisely.
SFAC No. 3
“Elements of Financial Statements of Business Enterprises,” provides definitions of items in financial statements, such as assets, liabilities, revenues, and expenses (superseded by SFAC No. 6)
Relevance
is one of the two fundamental qualities that make accounting information useful for decision-making
To have ________, accounting information must be capable of making a difference in a decision. Information with no bearing on a decision is irrelevant.
relevance
SFAC No. 2
“Qualitative Characteristics of Accounting Information,” examines the characteristics that make accounting information useful (superseded by SFAC No. 8)
What year did the FASB begin developing a conceptual framework?
1976
Free From Error
An item that is free from error will be a more accurate (faithful) representation of a financial item.
Consistency
Another type of comparability, consistency, is present when a company applies the same accounting treatment to similar events, from period to period.
Ingredients of Faithful Representation
Completeness, Neutrality, Free from error
What does SFAC stand for?
Statements of Financial Accounting Concepts
SFAC No. 5
“Recognition and Measurement in Financial Statements of Business Enterprises,” sets forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when.
Comparability
Information that is measured and reported in a similar manner for different companies is considered comparable. Comparability enables users to identify the real similarities and differences in economic events between companies.
Enhancing Qualities (Definition)
Enhancing qualitative characteristics are complementary to the fundamental qualitative characteristics. These characteristics distinguish more-useful information from less-useful information.
Ingredients of Relevance
Predictive value, Confirmatory value, Materiality
SFAC No. 7
“Using Cash Flow Information and Present Value in Accounting Measurements,” provides a framework for using expected future cash flows and present values as a basis for measurement.
Predictive Value
Financial information that has value as an input to predictive processes used by investors to form their own expectations about the future.
Why do we need a conceptual framework?
To be useful. It allows the FASB to issue more useful and consistent pronouncements over time.
The profession should be more able to quickly handle new emerging problems.
Conceptual Framework
Third Level:
The “How” Implementation
Assumptions
Principles
Constraint
