Ch. 2 Conceptual Framework

Question 1

Two fundamental characteristics of accounting information

Answer 1

Relevance

Representational faithfulness

Question 2

Describe relevance

Answer 2

Information must have the ability to make a difference in a decision.
It helps users make predictions about past, present and future events.

Question 3

Describe representational faithfulness

Answer 3

Information should accurately reflect an economic event or transaction.

Question 4

What are the 4 enhancing characteristics of accounting information

Answer 4

Comparability
Verifiability
Understandability
Timeliness

Question 5

Describe comparability

Answer 5

Info is measured and reported in a similar consistent way, company to company, and year to year

Question 6

Describe verifiability

Answer 6

Knowledgable independent users achieve similar results or reach a consensus

Question 7

Describe understandability

Answer 7

Info is clear and of sufficient quality

Question 8

Describe timeliness

Answer 8

Info should be given to decision-makers while it is still able to influence decisions.

Question 9

What are the 3 characteristics of Assets

Answer 9

Economic benefit that generates cashflow.
Entity has legal ownership, control of asset.
Benefits result from past transaction.

Question 10

What are the 3 characteristics of Liabilities

Answer 10

Represents a present duty or responsibility.
It obligates the entity.
Results from a past transaction.

Question 11

Define constructive obligation

Answer 11

They arise through the company’s acknowledgement of a potential economic burden, even though it’s not in the terms of the sales contract.

Question 12

Define equitable obligation

Answer 12

Arises due to moral or ethical considerations

Question 13

What is equity

Answer 13

Residual interest remaining after deducting liabilities from assets

Question 14

What are revenues

Answer 14

Increases in economic resources

Question 15

What are expenses

Answer 15

Decreases in economic resources, incurrence of liabilities

Question 16

What are gains

Answer 16

Increases in equity, not including revenue or owner investments

Question 17

What are losses

Answer 17

Decreases in equity, not including expenses or owner withdrawals

Question 18

What is the economic entity assumption

Answer 18

An assumption that a company’s business activity can be kept separate and distinct from its owners and other business units.

Question 19

Define control

Answer 19

The power to direct the activities of another entity to generate returns for the investor.

Question 20

What is the revenue recognition and realization principle

Answer 20

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.

Question 21

What is the matching principal?

Answer 21

Matching costs with the revenues they produced in the same period.

Question 22

What is the periodicity assumption?

Answer 22

A company’s economic activities can be divided into time periods.

Question 23

Define the monetary unto assumption

Answer 23

Money is the common denominator of economic activity

Question 24

What is the going concern assumption

Answer 24

Assumption that a company will continue to operate for the foreseeable future

Question 25

What is the historical cost principal

Answer 25

Provides guidance on measuring transactions and balances based on acquisition price.

Question 26

What is the fair value principal

Answer 26

Provides guidance on measuring financial statement elements using best estimates of market values.

Question 27

What is the full disclosure principle?

Answer 27

Anything relevant to decisions should be included in the financial statements.

Question 28

What must be considered in order to measure fair value

Answer 28

Attributes of the asset/liability
How the item is to be used (highest and best use)
Principal market (the most advantageous)
The valuation technique