Chapter 2

Question 1

Objective of financial reporting

Answer 1

The “why” - purpose of accounting; to provide financial info 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

Question 2

Fundamental Concepts

Answer 2

bridge between the “why” and the “how” of accting; qualitative characteristics of accting info and elements of financial statments

Question 3

Qualitative characteristics of Accting Info

Answer 3

Fundamental Qualities and their ingredients; enhancing qualities

Question 4

Fundamental Qualities

Answer 4

Relevance (predictive value, confirmatory value, materiality) and Faithful Representation (completeness, neutrality, free from error)

Question 5

Relevance

Answer 5

accting info must be capable of making a difference in a decision. Ingredients: predictive value, confirmatory value, materiality.

Question 6

predictive value

Answer 6

fin info that has value as an input to predictive processes used by investors to form their own expectation about the future

Question 7

confirmatory value

Answer 7

info helps users confirm or correct prior expectations

Question 8

materiality

Answer 8

info that makes a difference when it’s missing/not missing

Question 9

Faithful Representation

Answer 9

the numbers and descriptions match what really existed/happened. Ingredients: completeness, neutrality, free from error.

Question 10

Completeness

Answer 10

all info that is necessary for faithful representation is provided

Question 11

neutrality

Answer 11

a company cannot select information to favor one set of interested parties over another

Question 12

free from error

Answer 12

a more accurate representation of a fin item

Question 13

Enhancing Qualities

Answer 13

complementary to the fundamental qualitative characteristics; Comparability, consistency, verifiability, timeliness, understandability

Question 14

comparability

Answer 14

measured and recorded in a similar manner for different companies

Question 15

consistency

Answer 15

applying the same accting treatment to similar events from period to period WITHIN THE SAME COMPANY

Question 16

verifiability

Answer 16

independent measurers, using same methods, obtain similar results

Question 17

timeliness

Answer 17

info available to decision-makers before it loses its capacity to influence decisions

Question 18

understandability

Answer 18

quality of info that lets reasonably information users see its significance

Question 19

Equity

Answer 19

residual interest in the assets of an entity that remains after deducting its liabilities. Ownership interest

Question 20

Investments by Owners

Answer 20

increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it.

Question 21

distributions to owners

Answer 21

decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities to owners. Dist to owners decrease ownership interests (or equity).

Question 22

comprehensive income

Answer 22

change in equity (net assets) during a period from transactions and other events and circumstances from nonowner sources.

Question 23

Recognition, Measurement, disclosure

Answer 23

the “how” of accting; Assumptions, principles, and constraints

Question 24

4 basic assumptions

Answer 24

1. economic entity - company separate from owners
2. going concern - company will have a long life
3. monetary unit - money is the common denominator
4. periodicity - company can divide economic activity into periods

Question 25

Basic principles of accting

Answer 25

1. Measurement (historical cost or fair value)
2. revenue recognition - record revenue when realized (or realizable) and earned
3. Expense recognition (also called matching) - product costs=recognized in same period as sale; period costs=expensed when incurred
4. full disclosure - providing info that is of sufficient importance

Question 26

Constraints

Answer 26

cost, industry practices