Chapter 2: Conceptual Framework Flashcards
Qualitative Characteristics
Distinguish better information from inferior information for decision-making purposes.
Fundamental Qualities
Relevance and Faithful Representation
Relevance
Accounting information capable of making a difference in a decision.
Ingredients of Relevance
Predictive Value, Confirmatory Value, and Materiality
Predictive Value
Financial information that has value as an input to predictive processes used by investors to form their own expectations about the future.
Confirmatory Value
Relevant information that helps users confirm or correct prior expectations.
Materiality
Company-specific aspect that a company need not disclose if omitting it would not influence decisions.
Ingredients of Faithful Representation
Completeness, Neutrality, and Free from Error
Completeness
All information that is necessary for Faithful Representation is provided.
Neutrality
Companies can’t select information to favor one set of interested parties over another.
Free from Error
Information that is a more accurate representation of a financial item.
Enhancing Qualities
Comparability, Verifiability, Timeliness, and Understandability
Conservatism
Choosing the solution that will be least likely to overstate assets or income and/or understate liabilities or expenses.
Consistency
Companies should apply the same accounting treatment to similar events, from period to period.
Verifiability
When independent measurers, using the same methods, obtain similar results
Timeliness
Having information available to decision-makers before it loses its capacity to influence decisions.
Understandability
Quality of information that lets reasonably informed users see the significance.
4 Assumptions
Economic Entity, Going Concern, Monetary Unit, and Periodicity
Economic Entity Assumption
Economic activity can be identified with a particular unit of accountability. Activities are separate from its owners and other business units.
Going Concern Assumption
The company will have a long life.
Monetary Unit Assumption
Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
Periodicity
Companies can divide its economic activities into artificial time periods.
Principles of Accounting
Measurement, Revenue Recognition, Expense Recognition, and Full Disclosure
Historical Cost Principle (Measurement)
Companies account for and report many assets and liabilities on the basis of acquisition price
Fair Value (Measurement)
Price that would be received to sell an asset or paid to transfer a liability at the measurement date.
Fair Value Principle (Measurement)
Use of fair value measurements in financial statements
Revenue Recognition Principle
Requires companies to recognize revenue in the accounting period in which the performance obligation is satisfied
Expense Recognition Principle
Companies recognize expenses when the work or the product actually contributes to revenue
Full Disclosure Principle
Recognizes financial reports strive for sufficient detail to disclose matters that make a difference to users, yet sufficient condensation to make the information understandable
