Chapter 2 - Conceptual Framework for Financial Reporting

Question 1

Cost Constraint

Answer 1

The costs of providing the information must be weighed against the benefits that can be derived from using it.

Question 2

Economic Entity Assumption

Answer 2

Economic activity can be identified with a particular unit of accountability (separate from owners and other business units)

Question 3

Going Concern Assumption

Answer 3

Assumption that company will have a long life

Question 4

Periodicity Assumption

Answer 4

Implies that a company can divide it’s economic activities into artificial time periods.

Question 5

Historical Cost Principle

Answer 5

GAAP requires that companies account for and report many assets and liabilities on the basis of acquisition price (verifiable)

Question 6

Fair Value

Answer 6

Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 7

Revenue Recognition Principle

Answer 7

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

Question 8

Expense Recognition Principle

Answer 8

Companies recognize expenses not when they pay wages or make a product, but when the work (service) or the product actually contributes to revenue

Question 9

Describe Usefulness of Conceptual Framework

Answer 9

1) build on est. body of concepts/obj
2) framework for tackling new probs
3) increase users’ understanding
4) enhance comparability

Question 10

Objective of Financial Reporting

Answer 10

Provide financial information about reporting entity that is useful to creditors, investors, and lenders.

Question 11

Qualatative Characteristics

Answer 11

1) Funamental Qualities; 2) Enhancing Qualities

Question 12

Fundamental Qualities

Answer 12

1) Revelvance 2) Faithful Representation