Constraints and Present Value

Question 1

Define cost effectiveness

Answer 1

Cost Benefit limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 2

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

Answer 2

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 3

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

Answer 3

Definition,
Measurability,
Relevance,
Reliability.

Question 4

List the elements included in a full set of financial statements. (5 items)

Answer 4

1. Balance sheet
2. Income statement
3. Statement of comprehensive income
4. Statement of cash flows
5. Statement of owner’s equity.

Question 5

What is Conservatism?

Answer 5

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 6

What is the constraints to setting accounting standards?

Answer 6

Cost effectiveness (or cost-benefit).

Question 7

What does a fresh start measurement do?

Answer 7

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).