Conceptual Framework Flashcards
what is the conceptual framework
bedrock to base accounting standards on
scope of conceptual framework
- general purpose of financial reporting
- going concern assumption
- elements of financial statements
- measurement
- presentation and disclosure
primary users of financial report
existing/potential investors
existing/potential lenders and other creditors
other users of financial reports
employees
government
customers
qualities that asses usefulness of financial reports
Relevance
Faithful Representation
Comparability
Timeliness
Verifiability
Understandability
what are the two fundamental qualities of financial statements
relevance
faithful representation
what are the enhancing qualities of financial statements
comparability
timeliness
verifiability
understandability
what makes information relevant
if it has predictive and confirmatory value
(i.e. accurate predictions that are confirmed the following year)
what is material information
information that would have an impact on the accounts
how is materiality determined
each company has their own threshold
usually % based on revenue or assets
how can accounts have faithful representation
be complete
be natural (unbiased)
be free from error
when an account is ‘free from error’ does this mean 100% accurate
no , estimates can be made
eg depreciation is an estimate
but free from material error
THIS IS ADDRESSED IN DISCLOSURE NOTE
What does comparability mean
users can compare financial information
year on year
between entities
how is comparability achieved
using same accounting standards for the same types of items
what does verifiability mean
independent, knowledgeable observers are eligible to agree that the information provides faithful representation
example of direct verification
cash count, inventory count
example of indirect verification
models, processes, systems used to cross check
what does timeliness refer to
must be made available to users in sufficient time to influence decisions
how is understandability improved
presentation is:
clear
concise
what are the underlying assumptions of the understandability quality
users should have reasonable knowledge and understanding of business and economic activity
where does cost for financial reporting come from
company
then shareholders
how must cost be considered
consider the cost of creating and providing the information and the benefit the users get from the information
technically should only be produced if cost<benefits
what is the going concern basis
assumes that the entity will continue operations into the foreseeable future
i.e 12 months from date accounts are authorised for issues
what is an asset
a present economic resource controlled by an entity as a result of past events which has potential to produce future economic benefits
what is a liability
a present obligation of the entity to transfer an economic resource as a result of past events
what is an equity
assets - liabilities
what is income
increase in assets or decrease in liability that results in increase in equity
other than from shares, contributions from shareholders
what is an expense
decrease in assets or increase in liability that results in a decrease in equity
other than dividends
four measurement choices
historical cost
fair value
current cost
value in use
what is historical cost
amount paid to acquire asset
settlement cost of liability
what is fair value
amount obtained by selling less selling costs for an asset
market value of liabilty
what is current cost
cost of replacing less depreciation of an asset
settlement cost at that time of a liability
what is value in use
present value of future cash flows less disposal
