Conceptual Framework of Financial Reporting by Business Enterprises

Question 1

How does the conceptual framework of financial reporting constitute GAAP?

Answer 1

Ans:
The framework does not constitute GAAP but rather provides consistent direction for developing a blueprint specific GAAP.

Question 2

What is the six major subsections of the framework that connects with accounting principles?

Answer 2

Ans:

1) Objective of financial reporting
2) Qualitative characteristics of accounting information
3) Accounting assumptions
4) Basic accounting principles
5) Cost constraint
6) Elements of financial statements

Question 3

What is the objective of financial reporting?

Answer 3

Ans:
to provide information about the entity useful to current and future investors and creditors in making decisions as capital provides

Question 4

What is useful information?

Answer 4

1) The amount, timing, and uncertainty of an entity’s cash flows.
2) Ability of the entity to generate future net cash inflows
3) An entity’s economic resources (assets) and claims to those resources ( liabilities) that provides insight into the entity’s financial strengths and weaknesses, and its liquidity and solvency.
4) A management’s stewardship of responsibilities has effective financial capabilities.
5) The effect of transactions and other events that change an entity’s economic resources and the claims to those resources.

Question 5

What are the primary characteristics for the decision usefulness?

Answer 5

Ans:
Relevance is relevant if it makes a difference to decision makers in their role as capital providers. This type of information is relevant when it has predictive value, confirmatory value, or both.

Faithful Representation is information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Financial information that faithfully represents an economic phenomenon portrays the economic substance of the phenomenon.

Question 6

Define Predictive value

Answer 6

Information has predictive value if it assists capital providers in forming expectations about the future events.

Question 7

Define Confirmatory value

Answer 7

information has confirmatory value if it confirms or changes the past ( or present) expectations based on previous evaluations. For example, if reported earnings for a period bear out market expectation then it has confirmatory value.

Question 8

Define Materiality

Answer 8

Information that is material will impact a user’s decision. Materiality is somewhat pervasive throughout the objectives of financial reporting in the sense that the financial statements should present material information because it is decision useful.

Question 9

Define Completeness

Answer 9

Information is complete if it includes all data necessary to be faithfully representative.

Question 10

Define Neutral

Answer 10

information is neutral when it is free from any bias intended to attain a prespecified result, or to encourage or discourage certain behavior.

Question 11

Define free from error

Answer 11

Information is free from error if there are no omission or errors.

Question 12

Define Enhancing Characteristics

Answer 12

These are complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is relevant and faithfully represented.

Question 13

Comparability

Answer 13

The quality of information that enables users to identify similarities and differences between sets of information. Consistency in application of recognition and measure methods over time enhances comparability.

Question 14

Verifiability

Answer 14

Information is verifiable if different knowledgeable and independent observers could reach similar conclusions based on the information.

Question 15

Timeliness

Answer 15

Information is timely if it is received in time to make a difference to the decision maker. Timeliness can also enhance the faithful representation of information.

Question 16

Understandability

Answer 16

Information is understandable if the user comprehends it within the decision context at hand. Users are assumed to have reasonable understanding of business and accounting and willing to study the information with reasonable diligence.

Question 17

What is the pervasive use of accounting estimates ( depreciation, bad debt expense, pension estimates) is an example of what?

Answer 17

Ans:

Emphasizing relevance over faithful representation

Question 18

What is the use of historical cost as a valuation base is an example of what?

Answer 18

Ans:

is an example of emphasizing faithful representation over relevance.

Question 19

What are the accounting assumptions ?

Answer 19

Ans:

Entity assumption, going-concern assumption, and unit of measure assumptions.

Question 20

Entity assumptions

Answer 20

Ans:

is a separate accounting entity for each business organization.

Question 21

Going Concern Assumption ( also called continuity assumption)

Answer 21

Ans:
In the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue to be a going concern. Therefore, we do not show items at their liquidation or exit values.

applies historical cost

Question 22

Unit of Measure assumption

Answer 22

Ans:
Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated.