Chapter 2: Conceptual Framework

Question 1

Qualitative Characteristics

Answer 1

Distinguish better information from inferior information for decision-making purposes.

Question 2

Fundamental Qualities

Answer 2

Relevance and Faithful Representation

Question 3

Relevance

Answer 3

Accounting information capable of making a difference in a decision.

Question 4

Ingredients of Relevance

Answer 4

Predictive Value, Confirmatory Value, and Materiality

Question 5

Predictive Value

Answer 5

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

Question 6

Confirmatory Value

Answer 6

Relevant information that helps users confirm or correct prior expectations.

Question 7

Materiality

Answer 7

Company-specific aspect that a company need not disclose if omitting it would not influence decisions.

Question 8

Ingredients of Faithful Representation

Answer 8

Completeness, Neutrality, and Free from Error

Question 9

Completeness

Answer 9

All information that is necessary for Faithful Representation is provided.

Question 10

Neutrality

Answer 10

Companies can’t select information to favor one set of interested parties over another.

Question 11

Free from Error

Answer 11

Information that is a more accurate representation of a financial item.

Question 12

Enhancing Qualities

Answer 12

Comparability, Verifiability, Timeliness, and Understandability

Question 13

Conservatism

Answer 13

Choosing the solution that will be least likely to overstate assets or income and/or understate liabilities or expenses.

Question 14

Consistency

Answer 14

Companies should apply the same accounting treatment to similar events, from period to period.

Question 15

Verifiability

Answer 15

When independent measurers, using the same methods, 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

Quality of information that lets reasonably informed users see the significance.

Question 18

4 Assumptions

Answer 18

Economic Entity, Going Concern, Monetary Unit, and Periodicity

Question 19

Economic Entity Assumption

Answer 19

Economic activity can be identified with a particular unit of accountability. Activities are separate from its owners and other business units.

Question 20

Going Concern Assumption

Answer 20

The company will have a long life.

Question 21

Monetary Unit Assumption

Answer 21

Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

Question 22

Periodicity

Answer 22

Companies can divide its economic activities into artificial time periods.

Question 23

Principles of Accounting

Answer 23

Measurement, Revenue Recognition, Expense Recognition, and Full Disclosure

Question 24

Historical Cost Principle (Measurement)

Answer 24

Companies account for and report many assets and liabilities on the basis of acquisition price

Question 25

Fair Value (Measurement)

Answer 25

Price that would be received to sell an asset or paid to transfer a liability at the measurement date.

Question 26

Fair Value Principle (Measurement)

Answer 26

Use of fair value measurements in financial statements

Question 27

Revenue Recognition Principle

Answer 27

Requires companies to recognize revenue in the accounting period in which the performance obligation is satisfied

Question 28

Expense Recognition Principle

Answer 28

Companies recognize expenses when the work or the product actually contributes to revenue

Question 29

Full Disclosure Principle

Answer 29

Recognizes financial reports strive for sufficient detail to disclose matters that make a difference to users, yet sufficient condensation to make the information understandable