Chapter 2

Question 0

First level

Answer 0

Basic objectives

Question 1

The need for a conceptual framework

Answer 1

1. To develop a coherent set of standards and rules

2. To solve new and emerging practical problems

Question 2

Second level

Answer 2

Qualitative characteristics and elements

Question 3

Third Level

Answer 3

Recognition, measurement, and disclosure concepts

Question 4

Financial reporting objective

Answer 4

Provide information about the reporting entity that is useful to present and potential equity investments, lenders, and other creditors in their capacity as capital providers.

Question 5

Three ingredients of relevance

Answer 5

Predictive value
Confirmatory value
Materiality

Must make a difference in a decision

Question 6

Predictive value

Answer 6

Has value as an input to predictive processes used by investors to form their own expectations about the future.

Question 7

Confirmatory value

Answer 7

Relevant information also helps users confirm or correct prior expectations

Question 8

Materiality

Answer 8

Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information

Question 9

Ingredients of Faithful Representation

Answer 9

Completeness
Neutrality
Free from error

Numbers and descriptions match what really existed or happened

Question 10

Completeness

Answer 10

All the information that is necessary for faithful representation is provided

Question 11

Neutrality

Answer 11

A company cannon select information to favor one set of interested parties over another

Question 12

Free from error

Answer 12

An information item that is free from error will be more accurate (faithful) representation of a financial item

Question 13

Enhancing qualities

Answer 13

Comparability
Verifiability
Timeliness
Understandability

Question 14

Comparability

Answer 14

Information is measured and reported in a similar manner for different companies

Question 15

Verifiability

Answer 15

Occurs when independent measurers, using the same methods, can obtain similar results.

Question 16

Timeliness

Answer 16

Having information available to decision makers before it loses its capacity to influence decisions.

Question 17

Understandability

Answer 17

The quality of information that lets reasonably informed users see its significance

Question 18

Moment in time elements

Answer 18

Assets liabilities and equity

Question 19

Period of time elements

Answer 19

Investment by owners
Distribution to owners
Comprehensive income
Revenue 
Expenses 
Gains 
Losses

Question 20

Third level: basic assumptions

Answer 20

Economic entity -
Going concern - company to 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

Question 21

Third level: basic principles

Answer 21

Measurement
Revenue recognition
Expense recognition
Full disclosure

Question 22

Measurement principle

Answer 22

The most commonly used measurements are based on historical and fair value.

Historical cost provides reliable benchmark for measuring historical trends

Fair value may be more useful

Reporting of fair value is increasing

Question 23

Revenue recognition

Answer 23

Generally occurs when realized or realizable and when earned

Question 24

Expense recognition

Answer 24

Let the expense follow the revenues

Question 25

Full disclosure

Answer 25

Providing information that is of sufficient importance to influence the judgement and decisions of an informed user

Question 26

Third level: constraints

Answer 26

Cost constraint - cost of providing information must be weighed against the benefits that can be derived from using it.
Industry practice - the peculiar nature of some industries and business concerns sometimes requires departures from basic account theory