Chapter 2 - Conceptual Framework

Question 1

What are the fundamental qualities that make accounting information useful for decision-making? (2) (FaRR)

Answer 1

Faithful Representation & Relevance

Question 2

What are the enhancing qualities that make accounting information useful for decision-making? (4)

Answer 2

Comparability, Verifiability, Timeliness, Understandability

Question 3

What are the Ingredients for Fundamental Quality Relevance?

Answer 3

Predictive Value
Confirmatory Value
Materiality

Question 4

What are the Ingredients for Fundamental Quality Faithful Representation?

Answer 4

Completeness
Neutrality
Free from Error

Question 5

When is accounting information considered relevant?

Answer 5

Accounting information must be capable of making a difference in a decision. Information with no bearing on a decision is irrelevant.

Question 6

When does financial information have predictive value?

Answer 6

Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future.

Question 7

What are the basic elements of financial statements? (10)

Answer 7

1. assets
2. liabilities
3. equity
4. investments by owners
5. distributions to owners
6. comprehensive income
7. revenues
8. expenses
9. gains
10. losses

Question 8

When does financial information have confirmatory value?

Answer 8

When the information helps users confirm or correct prior expectations

Question 9

When is accounting information considered material?

Answer 9

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

Question 10

When is accounting information considered faithfully represented?

Answer 10

Faithful representation means that the numbers and descriptions match what really existed or happened.

Question 11

When is accounting information considered complete?

Answer 11

When an omission can cause information to be false or misleading and thus not be helpful to the users of financial statements

Question 12

In terms of financial information, what is the idea of Neutrality?

Answer 12

Neutrality means that a company cannot select information to favor one set of interested parties over another. Unbiased information must be the overriding consideration.

Question 13

When is financial information considered comparable?

Answer 13

Information that is measured and reported in a similar manner for different companies is considered comparable.

Question 14

When does financial information have verifiability?

Answer 14

Verifiability occurs when independent measurers, using the same measures, obtain similar results.

Question 15

When is financial information considered timely?

Answer 15

Timeliness means having information available to decision-makers before it loses its capacity to influence decisions.

Question 16

When is financial information considered understandable?

Answer 16

When information is classified, characterized, and presented clearly and concisely.

Question 17

What is the Economic Entity Assumption?

Answer 17

The assumption that a company keeps its activity separate and distinct from its owners and any other business unit.

Question 18

What is the Going Concern Assumption?

Answer 18

The assumption that a company will last long enough to fulfill their objectives and commitments.

Question 19

What is the Monetary Unit Assumption?

Answer 19

The assumption that money is the common denominator of economic activity and provides a basis for accounting measurement and analysis.

Question 20

What is the Periodicity Assumption?

Answer 20

The assumption that a company can divide its economic activities into artificial time periods. These time periods vary but the most common are monthly, quarterly, and yearly.

Question 21

What are the four basic principles of accounting to report and record transactions?

Answer 21

1. measurement
2. revenue recognition
3. expense recognition
4. full disclosure

Question 22

What are the four basic assumptions underlying financial accounting?

Answer 22

1. Economic Entity
2. Going Concern
3. Monetary Unit
4. Periodicity

Question 23

What is the Cost Constraint in reporting financial information?

Answer 23

Companies must weigh the costs of providing the information against the benefits that can be derived from using it.

Question 24

What is the name of the SEC’s financial statement information database?

Answer 24

EDGAR: Electronic Data Gathering, Analysis, & Retrieval

Question 25

When and why was the SEC created?

Answer 25

After the 1929 stock market crash, the Securities and Trade Commission was established by the federal government to help develop and standardize financial information of publicly traded companies.

Question 26

What group selects members of the FASB?

Answer 26

FAF (Financial Accounting Foundation)

Question 27

What is the relationship between the SEC and FASB?

Answer 27

The SEC delegates the task of developing standards to the private sector via the FASB but gives advice and recommendations as needed.

Question 28

What entity requires that members prepare financial statements in accordance with GAAP?

Answer 28

AICPA’s Code of Professional Conduct

Question 29

What is addressed in Rule 203 of the Code of Professional Conduct?

Answer 29

Financial statements being based on generally accepted accounting principles (GAAP)

Question 30

What does the Financial Accounting Standards Board Accounting Standards Codification do?

Answer 30

Eliminates nonessential information and simplifies user access to all authoritative U.S. generally accepted accounting principles

Question 31

What is the purpose of the Financial Accounting Foundation (FAF)?

Answer 31

To select the members of the FASB and the Advisory Council, funds their activities, and generally oversees the FASB’s activities