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Chapter 2 Acg > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

What is conceptual framework?

A

Concepts that define the nature, function and limits of financial accounting and reporting.

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2
Q

Why do we need a conceptual framework?

A

We want to set accounting standards on a foundation of established concepts and assumptions.

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3
Q

What is the objective of conceptual framework?

A

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

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4
Q

What are the two groups or the second level of the conceptual pyramid?

A

Qualitative characteristics and elements

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5
Q

What are the 10 parts of the element section of the second level?

A

Assets, liabilities, equity, investments by owners, distribution by owners, comprehensive income, revenues, expenses, gains and losses.

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6
Q

What are the 2 subtopics in the qualitative characteristics side of the second level?

A
  1. Fundamental qualities

2. Enhancing qualities

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7
Q

What are the subsections of the fundamental qualities?

A

A. Relevance

  1. predictive value
  2. confirmatory value
  3. materiality

B. Faithful representation

  1. Completeness
  2. Neutrality
  3. Free from error
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8
Q

What are the subsections of the Enhancing qualities?

A
  1. Comparability
  2. Verfiability
  3. Timeliness
  4. Understandability
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9
Q

What are the assumptions of the conceptual framework?

A
  1. Economic Entity
  2. Going Concern
  3. Monetary Unity
  4. Periodicity
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10
Q

What are the principles of the conceptual framework?

A
  1. Measurement
    - historical cost
    - fair value
  2. Revenue recognition
  3. Expense recognition
  4. Full disclosure
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11
Q

What are the constraints of the conceptual framework?

A
  1. Cost vs Benefit

2. Industry Practice

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12
Q

What are the 3 levels of fair value

A

level 1- (Most useful) assets you can measure
level 2- comparable
level 3- neither of the two

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13
Q

What are the 3 levels of the conceptual frame work.
Level 1-
Level 2-
Level 3-

A

Level 1- Objective - the “why”
Level 2- qualitative characteristics
Level 3- Assumptions, principles and constraints.

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14
Q

When did the statement of Financial Accounting Concepts (SFACs) starting 1978?

A

1978

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15
Q

What is an asset?

A

Something that gives probable future benefits obtained or controlled by an entity as a result of past transactions or events.

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16
Q

What are liabilities?

A

Something that causes probably future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

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17
Q

What is equity?

A

Residual interest in the assets of an entity that remains after deducting its liabilities. Ina business enterprise, the equity is the ownership interest.

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18
Q

What is investment by Owners?

A

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

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19
Q

What is distribution to Owners?

A

Decreases in net assets (decrease in equity) resulting from transferring assets, rendering services, or incurring liabilities to owners.

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20
Q

What is comprehensive income?

A

Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non owner sources. In other words, all changes in equity during a period except those resulting from investments by owners and distributions to owners.

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21
Q

What are revenues?

A

Inflows or others enhancements of assets of an entity or settlement of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity;s ongoing major or central operations.

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22
Q

What are expenses?

A

Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.

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23
Q

What are gains?

A

Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

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24
Q

What are losses?

A

Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses and distribution to owners.

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25
Q

What do Revenues, Gains, and Investments by owners have in common?

A

All are increases in net assets

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26
Q

What do Expenses, Losses and Distribution to owners have in common?

A

All are decreases in net assets

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27
Q

What is relevance?

A

Information that is capable of making a difference in a decision

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28
Q

What is predictive value?

A

it can help users form expectations about the future

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29
Q

What is confirmatory value?

A

it can confirm or refute previously formed expectations

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30
Q

What is materiality?

A

omitting it or misstating it could influence decisions that users make.

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31
Q

What is Faithful representation?

A

amounts and descriptions match what really happened or existed

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32
Q

What is completeness?

A

we have provided all the necessary information

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33
Q

What is neutrality?

A

The information is unbiased

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34
Q

What is free from error?

A

The information is accurate

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35
Q

What is comparability?

A

ability to compare financial information

Between two different entities

36
Q

What is consistency?

A

between two different accounting periods for the same entity (entity uses the same accounting methods from period to period)

37
Q

What is verifiability?

A

The info can be independently confirmed.

38
Q

What is timeliness?

A

the info is available before it loses its relevance

39
Q

What is understandability?

A

reasonably informed users should be able to comprehend the information that is clearly classified and presented.

40
Q

Quality information that permits users to identify similarities in and differences between two sets of economic phenomena

A

Comparability

41
Q

Having information available to users before it loses its capacity to influence decisions

A

Timeliness

42
Q

Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future.

A

Predictive Value

43
Q

Absence of bias intended to attain a predetermined result or to induce a particular behavior

A

Nuetraility

44
Q

Information that is capable of making a difference in the decisions of users in their capacity as capital providers

A

Relevance

45
Q

Quality of information that assures users that information represents the economic phenomena that it purports to represents….

A

Faithful representation

46
Q

Information about an economic phenomenon that corrects past or present expectations based on previous evaluations….

A

Confirmatory Value (confirming based on what you expect)

47
Q

The extent to which information is accurate in representing the economic substance of a transaction

A

Free From Error

48
Q

Includes all the info that is necessary for a faithful representation of the economic phenomena that it purports to represent…

A

Completeness

49
Q

Quality of info that allows users to comprehend its meaning….

A

Understandability

50
Q

What is recognition?

A

When we record transactions

51
Q

What is the economic assumption?

A
  • we must identify all transactions to a particular entity
  • we assume the entity is separate and distinct from the owners and from other business entities
  • entity concept does not preclude consolidated financial statements
52
Q

What are the going concern assumptions?

A
  • we assume the entity is an ongoing business witha long life
  • rule of thumb is looking ahead at least one year or one operating cycle.
  • going - concern assumption is the foundation for our definition of an asset
  • management has the responsibility ( new ASU) to assess going concern
  • We use conservatism when evaluation going concern. Not based on unfounded fears of what might happen in the future.
53
Q

What are the Perodicity Assumptions?

A
  • we divide time into measurable time periods to properly report the economic activities of the entity on its financial statements
  • when determining the periods, entities balance precision vs timeliness
54
Q

What is monetary assumption?

A
  • AKA stable monetary unit concept or constant currency concept or stable $ concept
  • money is the common denominator of economic activity so we measure transactions and events in units of money
  • we also assume that the monetary unit will remain relatively stable.
55
Q

Revenue Recognition Principle

A

Revenue is recognized when A) realized or realizable and B) earned.

56
Q

What is the criteria for recognizing revenue?

A
  • The performance obligation has been satisfied
  • an exchange has occurred
  • realization of the right to cash
57
Q

Expense Principle ( matching principle)

A

Expenses must be matched to revenues recorded in the same period

58
Q

what is direct matching?

A

an obvious match such as COGS for sales of inventory

59
Q

What is indirect matching?

A

using a systematic and rational method for matching expenses to revenues over the periods benefited

60
Q

What is full disclosure principle?

A

Financial statements must include enough information to influence judgement and decision making of an informed user.

61
Q

Measurement Principle has two parts:

A
  1. Historical Cost

2. Fair Value

62
Q

What is historical cost Principle?

A

The original acquisition cost of an asset or liability is a reliable basis of measurement and should be used.

63
Q

What is fair value principle?

A

The current fair value of an asset or liability is more relevant because it reflect current cash equivalent.

64
Q

SFAC no1

A

Objectives of financial reporting by business enterprises

-presents the goals and purposes of accounting

65
Q

SFAC no2

A

Qualitative Characteristics of accounting information

-examines the characteristics that make accounting information useful

66
Q

SFAC no3

A

Elements of Financial Statements of Business Enterprises

67
Q

SFAC no5

A

Recognition and Measurement in financial statements of business enterprises

  • 2 fundamental recognition criteria
  • definition - must meet the definition of an element per SFAC 6
  • measurability - must be measurable in currency
68
Q

SFAC no6

A

Elements financial statements (REPLACEMENT OF SFAC 3)

expands to include not for profit organizations.

69
Q

SFAC no7

A

Using cash flow information and present value in accounting measurements
- outlines how to use expected future cash flows and present value as a basis

70
Q

SFAC no 8

A

Conceptual framework of financial reporting

71
Q

SFAS NO 157 FAIR VALUE MEASUREMENT

A

2006
ASC 820-10
defines Fair value, establishes a measurement hierarchy, expands required disclosures in f/s

72
Q

biggest advantage of fair value measurement

A

relevance (users want FV)

73
Q

biggest disadvantage of fair value measurement

A

possible subjectivity

74
Q

level 1 of FV heiracrchy

A

Most reliable

established price through an active market

75
Q

level 2 of FV heirarchy

A

not active market

FV based on observable data, prices of comparable assets.

76
Q

Level 3 of FV heirarchy

A

no observable data and FV uses its own assumptions

77
Q

How is inventory measures on the balance sheet?

A

at each b/s date, we determine the market price of inventory. We report inventory at “Lower of cost or market” or “ lower of cost or net realizable value (LCNRV)

78
Q

How is AR measured on the balance sheet?

A

each b/s date we report “net realizable value” of receivables (what we actually expect to receive for the asset in the future)

79
Q

How are investments measured?

A

certain investments must be “Marked to market” (FV) at the end of each period

80
Q

How are long term receivables and liabilities measured?

A

We consider the time value of money at an expected discount rate and value LT assets and liabilities based on the present value of expected future cash flows.

81
Q

What is the cost restraint = cost vs benefit

A

the benefits that will be gained from providing certain accounting info should exceed the cost of providing that info

82
Q

Conservatism contstraint

A

a. when using estimates, choose the value that will be least likely to
- overstate assets or revenues
- understate liabilities or expenses
b. delay recognition of gains (until revenue recognition standards have been met)
c. recognize losses sooner rather than later (immediately when expected and measurable)

83
Q

target was involved in litigation over the last year. This litigation is disclosed in the financial statement

A

Full disclosure

84
Q

target allocated the cost of its depreciable assets over the life it expects to receive revenue from these assets

A

expense recognition

85
Q

target records the purchases of a new dell PC at its cash equivalent price

A

Historical cost

Chapter 2 Acg (1 decks)

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