Ch. 2 Conceptual Framework Flashcards
Two fundamental characteristics of accounting information
Relevance
Representational faithfulness
Describe relevance
Information must have the ability to make a difference in a decision.
It helps users make predictions about past, present and future events.
Describe representational faithfulness
Information should accurately reflect an economic event or transaction.
What are the 4 enhancing characteristics of accounting information
Comparability
Verifiability
Understandability
Timeliness
Describe comparability
Info is measured and reported in a similar consistent way, company to company, and year to year
Describe verifiability
Knowledgable independent users achieve similar results or reach a consensus
Describe understandability
Info is clear and of sufficient quality
Describe timeliness
Info should be given to decision-makers while it is still able to influence decisions.
What are the 3 characteristics of Assets
Economic benefit that generates cashflow.
Entity has legal ownership, control of asset.
Benefits result from past transaction.
What are the 3 characteristics of Liabilities
Represents a present duty or responsibility.
It obligates the entity.
Results from a past transaction.
Define constructive obligation
They arise through the company’s acknowledgement of a potential economic burden, even though it’s not in the terms of the sales contract.
Define equitable obligation
Arises due to moral or ethical considerations
What is equity
Residual interest remaining after deducting liabilities from assets
What are revenues
Increases in economic resources
What are expenses
Decreases in economic resources, incurrence of liabilities
What are gains
Increases in equity, not including revenue or owner investments
What are losses
Decreases in equity, not including expenses or owner withdrawals
What is the economic entity assumption
An assumption that a company’s business activity can be kept separate and distinct from its owners and other business units.
Define control
The power to direct the activities of another entity to generate returns for the investor.
What is the revenue recognition and realization principle
Revenue is recognized when risks and rewards have passed, revenue is measurable and collectible.
Revenue is realized when goods or services are exchanged for cash or claims to cash.
What is the matching principal?
Matching costs with the revenues they produced in the same period.
What is the periodicity assumption?
A company’s economic activities can be divided into time periods.
Define the monetary unto assumption
Money is the common denominator of economic activity
What is the going concern assumption
Assumption that a company will continue to operate for the foreseeable future
What is the historical cost principal
Provides guidance on measuring transactions and balances based on acquisition price.
What is the fair value principal
Provides guidance on measuring financial statement elements using best estimates of market values.
What is the full disclosure principle?
Anything relevant to decisions should be included in the financial statements.
What must be considered in order to measure fair value
Attributes of the asset/liability
How the item is to be used (highest and best use)
Principal market (the most advantageous)
The valuation technique
