Chapter 2- Conceptual Framework Flashcards
Second level of the conceptual framework does what
- Provides building blocks that explain qualitative characteristics of accounting information
- Define the elements of financial statements.
Qualitative characteristics made up of tow qualities
1) Fundamental qualities
2) Enhancing quantities
Two things make up fundamental qualities
- Relevance
2. Faithful Representation
Accounting information must be capable of making a difference in a decision. This is know as
Relevance
The three ingredients that determine the relevance of something are
- Predictive value
- Confirmatory value
- Materiality
Financial information that has value as an input into predictive processes used by investors to form their own expectations about the future
Predictive value
Relevant information that helps users confirm or correct prior expectations
Confirmatory value
Company specific aspect of relevance that if omitted or misstated could influence decisions that users make on the basis of reported financial information. The information must make a difference in order for it to be reported and it requires evaluating both the relative size and importance of an item
Materiality
The second fundamental quality
Faithful representation
This means that the numbers and descriptions match what really existed or happened
Faithful representation
Faithful representation has three ingredients
- Completeness
- Neutrality
- Free from error
This means that all the information necessary for faithful representation is provided, and an omission of this information can be false or misleading.
Completeness
This means that a company cannot select information to favor one set to f interested parties over another. Unbiased information
Neutrality
Provide a more accurate and faithful representation of a financial item if it is
Free from error
The second type of qualitative characteristic that is complementary to the fundamental qualitative characteristics
Enchanting qualities
Enhancing qualities are broken down into four characteristics
- Comparability
- Verifiability
- Timeliness
- Understandability
Information that is measured and reordered in a similar manner for different companies; enables issued to identify the real similarities and differences in economic events between companies
Comparability
This occurs when independent measurers, using the same methods, obtain similar results
Verifiability
This means having information available to decision makers before it loses its capacity to influence decisions
Timeliness
The connection between the users and the decisions they make; the quality of information that lets reasonably informed users see its significance
Understandability
There are 10 basic elements of financial statements
- Assets
- Liabilities
- Equity
- Comprehensive Income
- Investments by owner
- Distributions to owners
- Revenues
- Expenses
- Gains
- Losses
Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events
Asset
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of pastor transactions or events
Liabilities
Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, this is the ownership interest
Equity
Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase equity in it.
Investments by owners
Decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. This decreases equity
Distributions to owners
Change in equity of an entity during a period from transactions and other events and circumstances from nonowner sources. Includes all chances in equity during a period except those resulting from investments by owners and distributions from owners
Comprehensive Income
Inflows or other enhancements of assets of an entity or settlement of its liabilities, or a combination of both, during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
Revenues
Outflows or other using up of assets in incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations
Expenses
Increases in equity from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during s period except those that result from revenues or investments by owners
Gains
Decreases in equity from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses and distribution to owners
Losses
