Conceptual Framework and IFRS

Question 1

What are the 10 key elements that make up the financial statments?

Answer 1

Basic 3 Elements:

(1) Assets
(2) Liabilities
(3) Equity or Net Assets

3 Elements of Equity:

(4) Contributions/Investments by Owners
(5) Distributions to Owners (Dividends)
(6) Comprehensive Income (DENT)

4 Elements of Comprehensive Income

(7) Revenue
(8) Expenses
(9) Gains
(10) Losses

Question 2

What is the definition of an Asset?

Answer 2

Asset - an economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occured.

Question 3

What is the definition of a liability?

Answer 3

Liability is an economic obligation in which one needs to use or transfer an asset, it can’t be avoided and the transaction has already occured.

Question 4

What is equity or Net Assets?

Answer 4

Equity or Net Assets are the assets left over after deducting liablities.

Assets - Liabilities = Equity

Question 5

What are the 3 elements of Equity?

Answer 5

• Contributions/investments by owners
• Distributions to owners - Dividends
• Comprehensive Income - all changes in equity other than “owner” sources. These items affect comprehensive income but not net income (DENT)
  
  • Derivative cash flow hedges
  • Excess adjustment of Pension PBO and FV of plan assets at year end
  • Net unrealized gains or losses on “available-for-sale” securities
  • Translation adjustments for foreign currency

Question 6

What is Comprehensive Income?

Answer 6

Comprehensive Income - all changes in equity other than “owner” sources. These items affect comprehensive income but not net income (DENT)

• Derivative cash flow hedges
• Excess adjustment of Pension PBO and FV of plan assets at year end
• Net unrealized gains or losses on “available-for-sale” securities
• Translation adjustments for foreign currency

Four Elements of Comprehensive Income

Revenues - inflows from an entitiy’s primary operations

Expenses - outflows due to an entity’s primary operations

Gains - increases in equity from incidental transactions

Losses - decreases in equity from incidental transactions

Question 7

What are the Accounting Rules and Concepts that go along with the key elements:

Answer 7

Consistency - same principle each year

Conservatism - considering all risks inherent in the business Iaccruing a contingent loss)

Cost/Benefit - costs don’t exceed benefits to be derived.

Matching - recognize a cost as an expense in the same period as the benefit (usually a revneue) is recognized.

Allocation - spreading a cost over more than one period.

Full Disclosure - providing all useful info in the financial statements

Recognition - bookin an item in the financial statments

Realization - converting non-cash resources into cash or a claim to cash

Question 8

Monetary measurement terms

Answer 8

• Historical Cost - amount you paid for it (PP&E)
• Replacement Cost - what it would cost to replace an item (Inventory)
• FMV - “the price that would be received to sell an asset or paid to transfer a liablity in an orderly transaction between market participants at the measurement date.
• NRV - amount expected to be converted into (A/R)
• Present Value - discounted cash flows ude to the time value of money (Notes/Receivable, Bonds/Payable, Leases)