Chapter 2: Conceptual Framework Flashcards
What is conceptual framework and who was it developed by?
Developed by FASB, a theoretical foundation of interested objectives, concepts, principles, and definitions that leads to the establishment of consistent high quality financial Accounting standards and the appropriate application of those standards in accounting practices.
What are the basic assumptions of financial accounting?
1.) economic entity
2.) going concern
3.) monetary unit
4.) periodicity
Basic objective of conceptual framework:
Provide financial information 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.
Qualitative characteristics of accounting information:
Distinguishes more useful information from less useful information for decision making purposes.
Fundamental quality - relevance and ingredients
Accounting information must be capable of making a difference in a decision.
1.) predictive value - value as an input to predictive processes used by investors to form their own expectations about the future
2.) confirmatory value - helps users confirm or correct prior expectations.
3.) materiality- info is material if omitting or misstating it could influence decisions users make on basis of financial info
Fundamental quality - faithful representation and ingredients:
Numbers and descriptions match what existed or happened.
1.) completeness - all information necessary for faithful representation is provided.
2.) neutrality - company cannot select information to favor one set of interested parties over another.
3.) free from error- more accurate (faithful) representationof a financial item.
In order to be useful financial information must be both:
Relevant and faithfully represented.
Enhancing qualities:
Distinguish more used information from less useful information.
What are the 4 enhancing qualities, and describe them.
1.) comparability - information that is measured and reported in a similar manner for different companies.
2.) verifiability- occurs when independent measures using the same methods obtain similar results.
3.) timeliness- having information available to decision makers before it loses its capacity to influence decisions.
4.) understandability - quality of information that lets reasonably informed users see its significance.
What are the basics elements?
- Assets
- liabilities
- Equity
- Investment by owners
- Distribution to owners
- Comprehensive income
- Revenues
- Expenses
- Gains
- Losses
Concepts that assist in financial Accounting transactions.
Which assumption is this and why?
The economic activities of KC. Corporation are divided into 12-month periods for the purpose of issuing annual reports.
Periodicity, because they issue annual reports in a 12-month time period.
Which assumption is this and why?
Solectron Corporation, Inc does not adjust amounts in its financial statements for the effects of inflation.
Monetary unit because inflation is not recognized as a measurable unit.
Which assumption is this and why?
Walgreens Co, reports current and concurrent classifications in its balance sheet.
Going concern, because it is unknown whether the business is going to continue operating.
Which assumption is this and why?
Economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.
Economic entity
What are the four principles of Accounting
- Measurement - Commonly used measurements (historical cost and fair value)
- Revenue recognition - Companies recognized revenue in the accounting period which performance obligations are satisfied
- Expense recognition - Expenses are recognized following the same period as revenue.
- Full disclosure - Providing information that is of sufficient importance to influence the judgement and decisions of an informed user.
