Concept Statement 8

Question 1

Basic Ideas from Concept Statement 8

Answer 1

• Concept statements are the fundamental building blocks
  for GAAP
• Conceptual framework as a basis to build the accounting
  standards
• Concept Statement 8 superseded 1 & 2
• Non-Authoritative

Question 2

What are the concept statements intended to do?

Answer 2

• Set forth objectives and fundamental concepts - basis for
  the development of financial reporting and reporting
  guidance

Question 3

Who are the likely users of Financial Information?

Answer 3

• Standard Setters (ex: FASB and IASB
• Debtors and Creditors
• PCAOB is indirectly a user of the concept statements
• Others

Question 4

What is the status of the concept statements?

Answer 4

• Not GAAP
• Not Authoritative
• Does not apply to Rules 203 or 204 in the AICPA code of
  professional ethics (can’t use them to justify GAAP for an
  opinion, or disclosures)

Question 5

What is the basic purpose of financial reporting?

Answer 5

• To provide financial information to
  - Existing and potential investors
  - Lenders and other creditors
  - Primary user groups of financial reporting
• Has to be useful in making decisions about investing

Question 6

What is some of the information provided by general purpose financial reporting?

Answer 6

• Can provide information about economic resources and
  claims
• Helps identify financial strengths and weaknesses
• Liquidity and Solvency
• Needs for future financing

Question 7

What are some of the limitations of general purpose financial reporting?

Answer 7

• Does not provide all of the information that investors and
  creditors need
• Users need to consider other sources of info such as:
  
  • General economic conditions
  • Expectations
  • Political events
  • Industry and company outlooks

Question 8

How do changes in economic resources and claims help users?

Answer 8

Changes show
- Financial performance and returns
- New events related to issuing new debt or equity help
in assessing cash flows

Question 9

What does Accrual Accounting do?

Answer 9

• Provides information about revenue other than cash flows
  during a period
• Matches cash flow implications of economic events
  (Inflation, changes in market price) in this period
• Asses an entity’s past and future ability to generate net
  cash flows

Question 10

What are the qualitative characteristics of Financial Information?

Answer 10

• Identify the types of information that is most useful

- has to be Relevant and Faithful Representation

Question 11

What is relevant financial information?

Answer 11

• Information that is capable of making a difference in the

user’s decisions

Question 12

What are the characteristics of relevant information?

Answer 12

• Predictive Value (Forecasting past or present events,
  looking at trends to see why?)
• Confirmatory Value (Provides feedback, confirms or does
  not, on previous evaluations or expectations like a
  lawsuit)
• Both

Question 13

What is Faithful Representation?

Answer 13

• Information is accurately representing economic events

- Has 3 characteristics

Question 14

What are the 3 characteristics of Faithful Representation?

Answer 14

1) Complete - includes all necessary info
2) Neutral - without bias
3) Free from Error - no errors in selection or process

Question 15

What are the 4 enhancing qualitative characteristics?

Answer 15

1) Comparability
2) Verifiability
3) Timeliness - info available in time for users to influence
decisions
4) Understandability - clear and concise

Question 16

What is Materiality?

Answer 16

• If it is omitted or misstated could influence decisions

made on the basis of the financial info presented