Conceptual Framework - Wiley

Question 1

What are the primary qualitative characteristics of financial information?

Answer 1

Faithful representation and relevance (FARR)

Question 2

What are the ingredients of relevance?

Answer 2

Predictive value
Confirmatory value
Materiality

Question 3

What is predictive value?

Answer 3

To be relevant, accounting information should assist financial statement users in making predictions about future events.

Question 4

What is confirmatory value?

Answer 4

To be relevant, accounting information should assist decision makers in confirming past predictions.

Question 5

What are the ingredients of faithful representation?

Answer 5

Completeness
Free from material error
Neutrality

Question 6

What is completeness?

Answer 6

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

Question 7

What does it mean to be free from error?

Answer 7

Information is free from error if it is truthful.

Question 8

What is neutrality?

Answer 8

To be neutral, accounting information must be free of bias.

Question 9

List the enhancing qualitative characteristics of financial information.

Answer 9

Comparability
Verifiability
Timeliness
Understandability

Question 10

What is comparability?

Answer 10

The quality of information that enables users to identify similarities and differences between sets of information.

Question 11

What is verifiability?

Answer 11

Information is verifiable if different knowledgeable and independent observers can reach similar conclusions.

Question 12

What is timeliness?

Answer 12

To be relevant, accounting information must be received in time to make a difference to the decision maker.

Question 13

What is understandability?

Answer 13

Information is understandable if the user comprehends it with reasonable effort and diligence.

Question 14

What are objectives of financial reporting?

Answer 14

To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions

Question 15

Who is the target audience of financial statements?

Answer 15

Decision makers; mainly potential investors, creditors, and regulators

Question 16

How do we measure a revenue?

Answer 16

Revenue is measured as the cash equivalent amount of the good or service provided.

Question 17

What are revenues?

Answer 17

Revenues are increases in assets or extinguishment of liabilities stemming from delivery of goods or from providing services—the main activities of the firm.

Question 18

What does the historical cost accounting principle state?

Answer 18

Assets and liabilities are recorded at historical cost (i.e., that is, their cash equivalent amount at time of origination). This value is the market value of the item on the date of acquisition.

Question 19

When should a company recognize revenues?

Answer 19

Revenues are recognized when they are earned and collectibility is reasonably assured.

Question 20

What is the full disclosure principle?

Answer 20

Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.

Question 21

What is the unit of measurement assumption?

Answer 21

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.

Question 22

What is the entity assumption?

Answer 22

We assume there is a separate accounting entity for each business organization.

Question 23

What is the time period assumption?

Answer 23

The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes.

Question 24

What is the matching principle?

Answer 24

Recognize expenses only when expenditures help to produce revenues.

Question 25

What is the concept of capital maintenance?

Answer 25

Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels.

Question 26

What is the going-concern assumption?

Answer 26

In the absence of information to the contrary, a business is assumed to have an indefinite life (i.e., that is, it will continue to be a going concern).

Question 27

When does realization occur in the accounting period?

Answer 27

When:

1. Goods or services have been provided.
2. Collectibility of cash is assured.
3. Expenses of providing goods and services can be determined.

Question 28

List the elements which a present value measurement that fully captures economic differences should include.

Answer 28

1. An estimate of future cash flows
2. Expectations about variations in amount or timing of those cash flows
3. Time value of money as measured by the risk-free rate of interest
4. The price for bearing the uncertainty inherent in the asset or liability
5. Any other relevant factors

Question 29

What does a fresh start measurement do?

Answer 29

Establishes a new carrying value after an initial recognition and is unrelated to previous amounts (e.g., mark-to-market accounting and recognition of asset impairments)

Question 30

What are the four criteria that must be met to be recognized and measured in a financial report?

Answer 30

Definition
Measurability
Relevance
Faithful representation

Question 31

List the elements included in a full set of financial statements.

Answer 31

Balance sheet
Income statement
Statement of comprehensive income
Statement of cash flows
Statement of owner's equity

Question 32

What is Conservatism?

Answer 32

Conservatism (also called prudence) is the reporting of less optimistic amounts (lower income, net assets) under conditions of uncertainty or when Generally Accepted Accounting Principles (GAAP) provides a choice from among recognition or measurement methods.

Question 33

What is cost effectiveness?

Answer 33

This constraint on generally accepted accounting principles (GAAP) limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 34

What is the constraint in setting accounting standards?

Answer 34

Cost effectiveness (or cost-benefit)

Question 35

Define “cost effectiveness.”

Answer 35

This constraint on generally accepted accounting principles (GAAP) limits recognition and disclosure if the cost of providing the information exceeds its benefit.