Chapter 2 Flashcards
Conceptual Framework
Leads to consistent standards and it prescribes the nature, functions, and limitations of financial accounting and financial statements
What are the Statements of Financial Accounting Concepts intended to establish?
The objectives and concepts for use in developing standards of financial accounting and reporting.
What’s the objective of financial reporting?
To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.
What are the two groups of Qualitative Concepts?
- Fundamental qualities
2. Enhancing qualities
What are the two subtopics of Fundamental Qualities?
- Relevance
2. Faithful Representation
Relevance
Two topics
must be capable in making a difference in a decision.
1: Relevance
2. Faithful representation
The three subtopics of relevance are:
- Predictive value
- Confirmatory value
- Materiality
The 3 subtopics of faithful representation
- Completeness
- Neutrality
- Free from error
The four subtopics of enhancing qualities are:
- Understandability
- Verifiability
- Comparability
- Timeliness
On the second level of the pyramid includes elements. What do these consist of?
Assets Liabilities Equity Investment by owners Distribution to owners Comprehensive income Revenues Expenses Gains Losses
At the top of the pyramid is:
Recognition, Measurement, and Disclosure Concepts. What are the three topics of these?
- Assumptions
- Principles
- Constraints
Assumptions
- Economic entity
- Going-Concern
- Monetary Unit
- Periodicity
Going-Concern
company will last long enough to fulfill objectives and commitments
Monetary unit
money is the common denominator
Periodicity
Company can divide its economic activities into time periods
Measurement Principle
The most commonly used measurements are based on the historical cost and fair value.
Historical cost
provides a reliable benchmark for measuring historical trends
Fair value
Measurement at its price
Revenue recognition
Requires that the company recognize revenue in the accounting period in which the performance obligation is satisfied.
Expense
“Let the ___ follow the revenues”
Full disclosure
Providing information that is of sufficient importance to influence the judgment and decisions of an informed user:
- Financial statements
- Notes to the financial statements
- Supplementary information
Cost constraint
cost of providing information must be weighed against the benefits that can be derived from using it.
Comprehensive income
Includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Investment by owners
increases equity
-result from transfers of assets or services from other entities to an enterprise to
obtain or increase ownership interests in it.
