Chapter 1 - Conceptual Framework Flashcards
Enhancing Qualitative Characteristics
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Comparability (Consistency) - Same principles being used with business enterprises in similar industry/Save principle methods in different periods
Understandability - Classifying, characterizing and presenting information clear, and concisely
Timeliness - Info is available to a decision maker when it is useful to make the decision
Verifiability - Different sources agree on an amount through direct or indirect
Relevance
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Predictive Value - Help decision makers predict or forecast
Confirmatory Value (feedback value) - confirm or connect prior predictions
Faithful Representation
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Free of Error - No errors or omissions in the information
Neutrality (N/O bias) - The information is free from bias
Completeness - Information is presented in a way that users can understand
According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is:
Recognition is the process of reporting an item on the financial statements. Allocation is the process of spreading a cost over more than one period. Matching is the process of recognizing an expense in the same period in which a related benefit is recognized. Realization is the conversion of an item or service into cash or claim to cash
When are the Statements of the Financial Accounting Concepts intended to establish?
The objectives and concepts for use in developing standards of financial accounting and reporting
SFAC are intended are intended to create a conceptual framework for accounting. Although they do not establish GAAP, they do establish the objectives and concepts on which the standards of financial accounting and reporting are based. The meaning of the term “Present fairly in the accordance with GAAP” and the hierarchy of sources of GAAP were both established by pronouncements of the FASB
During a period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about:
Enterprise performance but not directly provide information about management performance
The objectives of financial reporting include providing direct information about an entity’s cash flows, financial position, and performance. The financial statements also provide indirect information about management’s performance.
According to the FASB Conceptual Framework, the usefulness of providing information in financial statements is subject to the consistent of:
Cost benefit
To the meet the objectives of financial reporting, information must be useful. Usefulness is subject to the constraints of cost-benefit analysis, whereby the value of the information should not exceed the cost of its collection and presentation
According to the FASB Conceptual Framework, which of the following situations violates the concept of neutrality:
Financial statements include properly with a carrying amount increased to management’s estimate of market value.
The concept of neutrality, which is an ingredient of faithful representation, indicates that the information in the financial statements is free from bias. This would not be the case when information is based on management’s estimate of market value which would be influenced by management’s perceptions.
ABC. Co. had the following beginning and ending balances in its prepaid expense and accrued liabilities accounts for the current year:
Pre-Paid Expenses: BB $5,000; EB $10,000
Accured Liabilities: BB $8,000; EB $20,000
Debits to operating expenses totaled $100,000. What amount did ABC Co. for the operating expenses during the period year?
Operating Expenses (given in problem): $100,000
PLUS Pre-Paid expenses (increases): $5,000
MINUS Accrued liabilities (increases): ($12,000)
Cash paid for operating expenses: $93,000
Materiality and relevance are both defined by:
What influences or makes a difference to a decision maker
An item is considered material or relevant only if it will influence a user of financial statements in making investment or credit decisions in relation to the reporting entity. They are a matter of professional judgement, different in every engagement, and are not measured on the basis of qualitative criteria established by the FASB.
According to the FASB conceptual framework, for financial reporting to be the useful, it must:
Provide information useful for making business and investment decisions in relation to the reporting entity.
Objectives of Financial Reporting
Providing information that is useful to investors and creditors; providing information about an entity’s resources and claims against them; reporting change in the entity’s economic resources and claims; reporting performance measured using accrual accounting; measuring financial performance in terms of cash flows; and reporting changes in economic resources and claims from sources other than the entity’s financial performance.
Asset
An economic resource with three essential characteristics:
Provides a probable future benefit;
It is under the control of the entity;
It results from a past transaction or event
According to the FASB conceptual framework, an entity’s revenue may result from:
A decrease in a liability from primary resources
Otherwise:
Decrease in an asset from primary operations will result in expense
Increases or decreases in assets or liabilities from incidental transactions result in gains and losses
Increase in an asset or a decrease in a liability from primary operations will result in revenue
Comprehensive Income
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Derivative Cash Flow hedges
Excess adjust of Pension PBO & FV of plan assets at year end
Net unrealized gain or loss on “avaiable-for-sales” securities
Translation adjustments for foreign currency
