Conceptual Framework of Financial Reporting and Business Enterprises Flashcards
What is the purpose of the Conceptual Framework?
To guide the standard setting process so that GAAP is cohesive & internally consistent
Ultimate goal, financial reporting to be decision useful
What are the two primary qualitative characteristics of the conceptual framework?
1) Faithful representation: ie can you depend on it?
2) Relevance: does it relate to my decision?
What comprises “faithful representation” characteristic?
a) completeness
b) neutrality (free from bias)
c) free from error
What comprises the “relevance” characteristic?
a) predictive value: helps predict future trends, based on past trends
b) confirmatory value: helps understand past actions
c) materiality: influence upon decision
What are the 4 Enhancing Characteristics?
1) Comparability: between companies
2) Verifiability: independent observers would reach similar conclusion
3) Timeliness: Recent enough to make a difference
4) Understandability: a user w/ reasonable understanding of business can comprehend
What are the 4 assumptions in the Conceptual Framework?
"Entirely from the gut" Entity Going Concern Unit of Measurement Time Period
What is the “Entity” assumption?
Entity is separate & distinct from owners
What is the “Going Concern” assumption?
Company has indefinite life that extends beyond life of owners
Absent evidence to contrary a business will continue on
What is the “Unit of Measurement” assumption?
Everything is measured in terms of a stable monetary unit of measure
ie. values not adjusted for in inflation
What is the “Time Period” assumption?
Break indefinite life into quarters, months & years for better evaluation of corporation
What are the 4 Accounting principles in Conceptual Framework?
“He ran miles further”
1) Historical Cost
2) Revenue Recognition
3) Matching
4) Full Disclosure
What is the “Historical Cost” principle?
Assets & Liabilities are recorded at the cash equivalent at time of origin
What is the “Revenue Recognition” principle?
Revenue recognized (ie recorded on F/S) when realized & earned realized = cash or A/R received earned = good or service has been delivered
What is the “Matching” principle?
Expenses matched w/ revenues generated w/in time period entity received benefit from those expenses
ie recognize expenses when they produce revenues
What is the “Full Disclosure” principle?
Not all information can be recognized on F/S
Those items that cannot are disclosed in the footnotes
