Chapter 2 (Kieso, 15th Ed)

Question 1

Assumptions

Answer 1

1. Economic Entity
2. Going Concern
3. Monetary Unit
4. Periodicity

Question 2

Principles

Answer 2

1. Measurement
2. Revenue Recognition
3. Expense Recognition
4. Full Disclosure

Question 3

Constraint

Answer 3

1. Cost

Question 4

Qualitative Characteristics

Answer 4

1. Fundamental

2. Enhancing

Question 5

Fundamental Qualities

Answer 5

Relevance

Faithful Representation

Question 6

Relevance Qualities

Answer 6

Predictive Value
Confirmatory Value
Materiality

Question 7

Faithful Representation Qualities

Answer 7

Completeness
Neutrality
Free from Error

Question 8

Enhancing Qualities

Answer 8

Comparability
Verifiability
Timeliness
Understandability

Question 9

Objective of Conceptual Framework

Answer 9

Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors (useful and consistent over time)

Question 10

Relevance

Answer 10

accounting information must be capable of making a difference to a decision

Question 11

Faithful Representation

Answer 11

the numbers and descriptions match what really existed or happened

Question 12

Predictive Value

Answer 12

financial info can be used as an input to predictive processes used by investors to form expectations about the future

Question 13

Confirmatory Value

Answer 13

helps users confirm and correct prior expectations based on previous evaluations

Question 14

Materiality

Answer 14

company-specific evaluation of whether omitting or misstating information could influence decisions that users make on the basis of reported financial information

important to consider magnitude and nature of item in question (most adopt rule of under 5% of net income)

Question 15

Completeness

Answer 15

all the info necessary for faithful representation (no important omissions)

Question 16

Neutrality

Answer 16

cannot select information to favor one set of interested parties over another

(prudence v conservatism)

Question 17

Free from Error

Answer 17

accurate representation of financial item (does not mean absolute because of estimates)

Question 18

Comparability

Answer 18

info is measured and reported in a similar manner for different companies (allows for comparisons) - consistency

Question 19

Consistency

Answer 19

a company uses the same treatment for similar events from period to period

Question 20

Verifiability

Answer 20

independent measurers, using same methods, get the same results

Question 21

Timeliness

Answer 21

having the information available to decision-makers before it loses its capacity to influence decisions

Question 22

Understandability

Answer 22

reasonably informed users should be able to interpret the financial information

Question 23

Economic Entity Assumption

Answer 23

economic activity can be identified with a particular unit of accountability (reason for accrual)

Question 24

Going Concern Assumption

Answer 24

company will have a long life so that it can fulfill its objectives and commitments (makes depreciation and amortization policies justifiable)

only inapplicable during liquidation

Question 25

Monetary Unit Assumption

Answer 25

money is the common denominator of economic activity

Question 26

Periodicity Assumption (Time Period Assumption)

Answer 26

implies that a company can divide its economic activities into artificial time periods

Question 27

Historical Cost Principal

Answer 27

GAAP requires that companies account for and report many assets and liabilities on the basis of acquisition price because it is generally thought to be verifiable

Question 28

Fair Value

Answer 28

price that would be received if asset was sold can be subjective which makes it difficult

Question 29

Measurement Principle

Answer 29

currently mixed system of historical cost/fair value

Question 30

Revenue Recognition Principle

Answer 30

requires companies recognize revenue in accounting period in which performance obligation was satisfied

Question 31

Expense Recognition Principle

Answer 31

companies recognize expenses by matching expenses with revenues

Question 32

Full Disclosure Principle

Answer 32

companies should provide information that is of sufficient importance to influence judgement and decisions of an informed user

ex notes, supplementary information

Question 33

Cost Constraint

Answer 33

companies must weigh the costs of providing info against the benefits that can be derived from using it