Chapter 2 Flashcards
Objective of financial reporting
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
Fundamental Concepts
bridge between the “why” and the “how” of accting; qualitative characteristics of accting info and elements of financial statments
Qualitative characteristics of Accting Info
Fundamental Qualities and their ingredients; enhancing qualities
Fundamental Qualities
Relevance (predictive value, confirmatory value, materiality) and Faithful Representation (completeness, neutrality, free from error)
Relevance
accting info must be capable of making a difference in a decision. Ingredients: predictive value, confirmatory value, materiality.
predictive value
fin info that has value as an input to predictive processes used by investors to form their own expectation about the future
confirmatory value
info helps users confirm or correct prior expectations
materiality
info that makes a difference when it’s missing/not missing
Faithful Representation
the numbers and descriptions match what really existed/happened. Ingredients: completeness, neutrality, free from error.
Completeness
all info that is necessary for faithful representation is provided
neutrality
a company cannot select information to favor one set of interested parties over another
free from error
a more accurate representation of a fin item
Enhancing Qualities
complementary to the fundamental qualitative characteristics; Comparability, consistency, verifiability, timeliness, understandability
comparability
measured and recorded in a similar manner for different companies
consistency
applying the same accting treatment to similar events from period to period WITHIN THE SAME COMPANY
verifiability
independent measurers, using same methods, obtain similar results
timeliness
info available to decision-makers before it loses its capacity to influence decisions
understandability
quality of info that lets reasonably information users see its significance
Equity
residual interest in the assets of an entity that remains after deducting its liabilities. Ownership interest
Investments by Owners
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.
distributions to owners
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).
comprehensive income
change in equity (net assets) during a period from transactions and other events and circumstances from nonowner sources.
Recognition, Measurement, disclosure
the “how” of accting; Assumptions, principles, and constraints
4 basic assumptions
- economic entity - company separate from owners
- going concern - company will have a long life
- monetary unit - money is the common denominator
- periodicity - company can divide economic activity into periods
