Chapter Two: Conceptual Framework for Financial Accounting

Question 1

First Concept Statement

Answer 1

Objectives of Financial Reporting

Question 2

Second Concept Statement

Answer 2

Fundamental Concepts of Financial Accounting

Question 3

Relevance (primary qualitative characteristic)

Answer 3

if know that information, could lead to make different decision

Question 4

What makes data relevant?

Answer 4

Predictive value OR feedback value AND timely

Question 5

Predictive Value

Answer 5

ability to have sense of what something will be in future

Question 6

Feedback value

Answer 6

help you analyze your prediction of future

Question 7

What makes data reliable? (primary qualitative characteristic)

Answer 7

Verifiable, representatively faithful, and neutral

Question 8

Comparability (secondary qualitative characteristic)

Answer 8

Make inferences about similar companies when put side by side

Question 9

Consistency (secondary qualitative characteristic)

Answer 9

Compare financial statements with past

Question 10

What are the basic elements of financial statements?

Answer 10

Assets, Liabilities, Equity, Investments by Owners, Distribution to Owners, Comprehensive Income, Revenue, Expenses, Gains, and Losses

Question 11

Assets

Answer 11

1) Probable future benefit, 2) Organizational control, 3) Transaction must have already occurred—>economic exchange

Question 12

Liabilities

Answer 12

probable future sacrifice, most of the time something you owe someone else (exception: environmental liability)

Question 13

Equity

Answer 13

assets = liabilities + owner’s equity, therefore owner’s equity = assets - liabilities, residual interest, equity = net assets

Question 14

Investments by Owners

Answer 14

buy stock from company (primary stock)

Question 15

Distribution to Owners

Answer 15

dividends or some sort of asset

Question 16

Comprehensive Income

Answer 16

changes in equity not caused by investment by owners or distribution to owners

Question 17

Revenue

Answer 17

Inflow of resources from normal operations, increase in owner’s equity

Question 18

Expense

Answer 18

Outflow of resources from normal operations

Question 19

Gains

Answer 19

inflow of resources from something other than normal operations

Question 20

Losses

Answer 20

outflow of resources from something other than normal operations

Question 21

Third Concept Statement

Answer 21

Recognition and Measurement Concepts

Question 22

Basic Assumptions of 3rd Concept Statement

Answer 22

Economic Entity, Going Concern, Monetary Unit, and Periodicity

Question 23

Economic Entity

Answer 23

can distinguish between organization and owners in money sense

Question 24

Going Concern

Answer 24

assumption that company will remain in service forever

Question 25

Monetary Unit

Answer 25

use of single monetary unit, put everything in one unit, translation occurs at time of consolidation of financial statements

Question 26

Periodicity

Answer 26

economic activity can be split into time units. leads to cutoffs

Question 27

Basic Principles of 3rd Concept Statement

Answer 27

historical cost, revenue recognition principle, matching, and full disclosure

Question 28

Historical Cost

Answer 28

record price of something as what it is at time of sale and does not change (inflation never accounted for)

Question 29

Revenue Recognition Principle

Answer 29

must be realized (have the money) or realizable (reasonable expectation of getting money), must be earned (performed service or delivered product promised in exchange for money)

Question 30

Matching

Answer 30

recognize expense and match with revenue

Question 31

Full Disclosure

Answer 31

found in 3 places, provides information about financials

Question 32

Constraints on 3rd Concept Statement

Answer 32

cost/benefit, materiality, industry practice, conservatism

Question 33

Cost/Benefit

Answer 33

if benefit does not outweigh costs, don’t pursue asset

Question 34

Materiality

Answer 34

don’t worry abut small stuff

Question 35

Industry Practice

Answer 35

use accounting dictated by industry

Question 36

Conservatism

Answer 36

all things equal, will report minimized recognized value