Conceptual Framework of Accounting

Question 1

What is the Conceptual Framework of Accounting

Answer 1

A statement of Generally Accepted accounting Principles created by FASB. It provides the foundation on which statements are prepared

Question 2

Qualitative Characteristics of Accounting Infor

Answer 2

1) Relevance - must be able to influence decisions
2) Faithful Representation - free from error and neutral
3)Verifiability/ Reliability- can be proven objectively
4) Understandability - can be understood by persons with reasonable knowlegde
5) Timeliness
6) Comparability - most be consistent with methods

Question 3

Assumptions

Answer 3

Provide a foundation

1) Economic Entity - business is separate from owners
2) Going Concern - a business is assumed to have an indefinite life
3) Monetary Unit - only transactions that can be expressed monetarily are included
4) Periodicity - assumes economic life of a business can be divided into artificial time periods

Question 4

Principles

Answer 4

Rules that indicate reporting for events

1) Historical Cost
2) Revenue Recogntion
3) Matching Principle
4) Full Disclosure - events that make a difference in FS must be disclosed

Question 5

Constraints

Answer 5

Allow for relaxation of principles

1) Cost- Benefit - cost of preparing statements should not exceed benefits
2) Industry Practice - sometimes treatment of elements is based on current industry practice
3) Materiality - likelihood for an item to influence decision of prudent investors/creditors
4) Conservatism - choose method least likely to overstate assets/income or understate liabilities/expenses