Conceptual Framework

Question 1

Conceptual Framework is the guiding principles of

Answer 1

GAAP and FASB when setting new standards.

Question 2

The main idea behind the framework is

Answer 2

to make Financial reporting useful for making decisions.

Question 3

What are the two qualitative characteristics and their components?

Answer 3

Relevance
- Predictive Value: does it help make predictions about future events.
- Confirmatory Value: does is confirm expectations or prior predictions.
- Material: does the information matter to the users in scope and size.
Faithful Representation
- Completeness: are all the necessary facts in included in the F/S, Nothing is omitted
- Neutral: is the information free from bias.
Free from Error: the information does not contain material errors.

Question 4

What are the four enhancing characteristics?

Answer 4

Comparability - Can the information be used to compare to other companies - or year over year.
Verifiability - Independent observers would reach the same conclusion.
Timeliness - The information is recent enough to make decision with.
Understandability - A user with a reasonable understanding of business can understand and draw conclusions from the information.

Question 5

GAAP addresses three main aspects of Financial Reporting

Answer 5

Recognition - When an item is recorded on the F/S.
Measurement - How an item is recorded on the F/S.
Disclosures - Disclosing anything not on the F/S.

Question 6

Standard Setting Process

Answer 6

First - a project is added to the agenda.
Second - search is conducted and issue a discussion memo.
Third - Hold a public hearing.
Forth - Evaluate the research and comment from the interest parties and issue and exposure draft. This is the first version for the new standard.
Fifth - solicit additional comments and modify the exposure draft.
Sixth - the finalize and hold a vote. 4 out of 7 to approve the new Accounting Standard update. (ASU)

Question 7

The FASB is a(n):
A. Private sector body.
B. Governmental unit.
C. International organization.
D. Group of accounting firms.

Answer 7

A. Private Sector body
The FASB is a private sector body although it is subject to scrutiny by the SEC, an agency of the federal government.

Over the years, the U.S. Congress has maintained a fairly consistent preference for keeping the standard setting process within the private sector.

Question 8

The FASB has maintained that:
A. The interests of the reporting firms will be a primary
consideration when developing new GAAP.
B. GAAP should have little or no cost of compliance.
C. New GAAP should be neutral and not favor any particular
reporting objective.
D. GAAP should result in the most conservative possible
financial statements.

Answer 8

C. New GAAP should be neutral and not favor any particular
reporting objective.

One of the objectives of the FASB in setting standards is to develop rules that are unbiased. FASB statements generally do not reflect any reporting bias.
For example, the requirement to expense all research and development costs is uniform across all firms and does not favor one firm over another.