Chap. 2.3

Question 1

Conceptual framework

Answer 1

the foundation for the accrual basis of accounting.

• guides what to present in financial statements, alternative ways of reporting economic events, and appropriate ways of communicating this information.

Question 2

Objective of financial reporting

Answer 2

provides financial information that is useful in making investing, lending, and other economic decisions.

• decision makers should be able to make predictions about the future cash flows and future cash dividends of the business.
• provide information about the assets and liabilities, and transactions that caused them to change.

Question 3

Qualitative characteristics of useful financial information

Answer 3

includes fundamental qualitative characteristics and enhancing qualitative characteristics.

Question 4

Fundamental qualitative characteristic

Answer 4

Relevance (predictory value, confirmatory value, materiality) and faithful representation.

Question 5

Relevance

Answer 5

knowledge of it will make a difference in a user’s decision.
- Predictive value: helps users make predictions
- Confirmatory value: helps users confirm or correct previous their previous previous expectations.
- materiality: information if omitted could influence the decision of users.

Question 6

Faithful representation

Answer 6

describes information that represents economic reality.
- Complete: nothing important was omitted.
- Neutral: not biased toward one position or another.
- free from material error: provides an accurate description and no errors were made in the process used to determine it.

Question 7

Enhancing qualitative characteristics

Answer 7

enhances the usefulness of information.
- comparability, verifiability, timeliness, understandability

Question 8

Comparability

Answer 8

enables users to identify and understand similarities in, and differences among, items.

Question 9

Verifiability

Answer 9

different knowledgeable and independent users could reach a consensus that the information is faithfully represented.

Question 10

timeliness

Answer 10

information is available to decision makers in time to be capable of influencing their decisions.
(before it loses its usefulness).

Question 11

understandability

Answer 11

information is clearly and concisely classified, characterized, and presented.

Question 12

Cost constraint

Answer 12

This ensures that the value of the information provided in the financial reporting is greater than the cost of providing it.

Question 13

Going concern assumption

Answer 13

the assumption that the business will remain in operation for the foreseeable future.

Question 14

Elements of the financial statements

Answer 14

a set of broad categories or classes used to group financial information for presentation in the financial statements, such as assets, liabilities, equity, revenue, income (and gains), and expenses (and losses).

Question 15

Measurement of the elements

Answer 15

principles that describe which, when and how the elements of financial statements should be recognized, measured, and reported.
- Historical cost vs. fair value

Question 16

Historical cost basis of accounting

Answer 16

states that assets and liabilities should be recorded at their cost at the time of acquisition.

Question 17

Fair value basis of accounting

Answer 17

assets and liabilities are recognized on the statement of financial position at their fair values.

Fair value: an estimate of the price a company would pay to purchase an asset or settle a liability today with arms’ length parties under normal business conditions.