Chapter 2: Conceptual Framework for Financial Reporting Flashcards
What are the three decisions accounting standards have to address?
- Which events should be recognized
- How should these events be measured
- How should this information be presented or summarized
What is the authoritative status of the conceptual framework?
It is used when no standard or interpretation related to the reporting issue is present.
What is the cost constraint?
When the benefit to users is less than the cost to provide the information.
What are the primary characteristics of useful accounting information?
- Relevant
- Representationally faithful
What is relevant accounting information?
- Has predictive value
- Has confirmatory value
- Must make a difference in size or nature
What is faithful represented information?
- Complete
- Error-free
- Neutral
What are the secondary characteristics of financial information?
- Comparable across firms
- Consistent across years for same firm
- Verifiable by different measures
- Timely - received early enough to use in decisions
- Understandable by a person with a reasonable understanding of business
What are the assumptions (things we don’t question) that underlie the conceptual framework?
- Econcomic entity
- Going concern
- Periodicity
- Monetary unit
What is economic entity assumption?
Entities are separate and distinct from their owners and other entities.
What is the going concern assumption?
The company intends to continue its business and is able to do so.
What is the periodicity assumption?
Financial reporting summarizes results across a fiscal period.
What is the monetary unit assumption?
Results are measured in dollars.
What are the broad accounting principles in the conceptual framework?
- Historical cost - items are recorded at acquisition price
- Realization (revenue recognition) - revenues are realized when earn (performance obligation)
- Matching (expense recognition) - expenses are recognized in the same period as related revenue
- Full-disclosure - understand info that makes a difference is always given
What are the fair value inputs?
- Level 1 - prices from active markets
- Level 2 - prices from similar markets
- Level 3 - prices from models
