Chapter 2- conceptual framework Flashcards
Describe the conceptual framework for financial reporting
- this is the foundation for the accrual basis of accounting
- it guides decisions about: what to present in financial statements, alternative ways of reporting economic events, appropriate ways of communicating this information
what are the key items of the conceptual framework for financial reporting (6)
- objective of general purpose financial reporting
- qualitative characteristics of useful financial information
- cost constraint
- Going concern assumption
- elements of financial statements
- measurement of the elements of financial statements
Describe objectives of financial reporting
- financial reports should provide information that is USEFUL in making investing, lending and other economic decisions
- financial reports should provide information that is useful to decision makers in predicting the future cash flows of businesses and future cash dividends from those businesses
- financial reports should provide information about the assets and liabilities of businesses and the transactions and other events that have resulted in changes in those assets and liabilities
What are the FUNDAMENTAL qualitative characteristics that are part of the conceptual framework
- Relevance - will make a difference in a users decision (predictive value, confirmatory value, materiality)
- Faithful representation - represents the economic reality (Complete, Neutral, Free from material error)
What are the 3 components to the relevance factor of the fundamental qualitative characteristics
- Predictive value - helps users make predictions about future events
- Confirmatory value - helps users confirm or correct their previous predictions or expectations
- Materiality - information is material if its omission or misstatement could influence the decisions of users
What are the 3 components of the faithful representation aspect of fundamental qualitative characteristics
- Complete - nothing important was omitted
- Neutral - not biased toward one position or another
- Free from material error
What are the 4 enhancing qualitative characteristics
- Comparability (identify and understand similarities and differences)
- Verifiability (Independent consensus can be reached)
- Timeliness (Available before it loses its usefulness)
- Understandability (Classified, characterized, and presently clearly and concisely)
Describe the cost constraint aspect of the conceptual framework
- ensures that the value of the information is greater than the cost of providing it
Describe the going concern assumption in the conceptual framework
- assumes a company will continue in operation for the foreseeable future
Describe the elements of financial statements laid out in the conceptual framework
- assets, liabilities, equity, income and expenses
Describe Measurement of the elements of financial statements in the conceptual framework
- these are principles that describe which, when, and how the elements of financial statements should be:
–> recognized
–> measured
–> and reported
–> distinguishes historical cost and fair value - in choosing between these two apply the concepts of relevance and faithful representation
Describe historical cost as described by measurement of the elements of financial statements in the conceptual framework
- assets and liabilities should be recorded at their cost when acquired
- not only at the time of purchase but throughout the life of each asset and liability
Describe fair value as described by measurement of the elements of financial statements in the conceptual framework
- certain assets and liabilities can be recorded and reported at fair value
In choosing between historical cost and fair value in the measurement of the elements of financial statements framework, what two concepts do you apply
Concepts of relevance and faithful representation (the fundamental qualitative characteristics)
