concepts in chapter 2 Flashcards
According to the FASB, useful information should possess two fundamental qualities. What are they?
Relevance and Faithful representation.
Accounting information has relevance if it would make a difference in a business decision. What 3 things show relevance?
PREDICTIVE VALUE (helps provide accurate expectations abt the future) CONFIRMATORY VALUE (confirms or corrects prior expectations) MATERIALITY (size)
Faithful representation means that info accurately depicts what really happened. What 3 things provide faithful representation?
Complete
Neutral (not biased)
Free from Error
What are enhancing qualities of useful information?
Comparability Consistency Verifiability Timeliness Understandability
A classified balance sheet groups together similar assets and similar liabilities, using a number of standard classifications and sections. What order do those sections go in?
Assets: Current assets Long term investments Property, Plant, and Equipment Intangible Assets
Liabilities and stockholders equity:
Current liabilities
Long term liabilities
Stockholders equity
What is Monetary Unit Assumption
The monetary unit assumption requires that only those things that can be expressed in money are included in the accounting records.
What is Economic Entity Assumption
The economic entity assumption states that every economic entity can be separately identified and accounted for. In order to assess a company’s performance and financial position accurately, it is important to not blur company transactions with personal transactions (especially those of its managers) or transactions of other companies.
What is Periodicity Assumption Notice
The periodicity assumption states that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.
What is Going Concern Assumption?
the going concern assumption states that the business will remain in operation for the foreseeable future.
What is HISTORICAL COST PRINCIPLE
The historical cost principle (or cost principle) dictates that companies record assets at their cost. This is true not only at the time the asset is purchased but also over the time the asset is held.
What is FAIR VALUE PRINCIPLE
The fair value principle indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Fair value information may be more useful than historical cost for certain types of assets and liabilities. For example, certain investment securities are reported at fair value because market price information is often readily available for these types of assets.
What is COST CONSTRAINT
It weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.
