Constraints and Present Value

Question 1

Cost Constraint

Answer 1

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

Question 2

Conservatism

Answer 2

reporting of less optimistic amounts under conditions of uncertainty or when GAAP provides a choice from among recognition or measurement methods.

Question 3

Three effects of Conservatism?

Answer 3

1) Conservatism is guildine that is used to limit the reporting of aggressive accounting information. Conservatism is used to avoid misleading internal and external users of the financial statements.
2) If estimates of an outcome are not equally likely, the preferred approach is to report the most likely estimate, rather than the more conservative estimate, if the latter is less likely
3) It should be noted that overly conservative estimates can be misleading and cause over reporting in subsequent periods.

Question 4

Financial statements should include:

Answer 4

1) Financial position at year-end ( Balance sheet)
2) Earnings for the year ( Income Statement)
3) Comprehensive Income for the year - total non-owner changes ( statement of comprehensive income)
4) Cash flows during the year ( statement of cash flows)
5) Investments by and distributions to owners during the year ( statement of owner’s equity)

Question 5

Recognition and Measurement Criteria for financial reporting

Answer 5

Ans:
Definition - definition of a financial statement element is met

Measurability - There is an attribute to be measured such as historical cost.

Relevance - the information to be presented in the financial report is capable of influencing decisions. The information is timely, that is predictive ability, provides feedback value, and is material.

Faithful Representation - the information is complete , neutral ,and free from material error.

Question 6

Elements of financial Statements

Answer 6

Ans:
Assets
Liabilities 
Equity 
Investments by owners
Distributions to owners
Comprehensive Income
Revenues
Expenses 
Gains
Losses

Question 7

Fresh Start Measurement

Answer 7

it is a established and new carrying value after an initial recognition and unrelated to previous amounts.

Question 8

What if fair value is not present in an asset or liability

Answer 8

Ans:

use present value because it is often the best available technique to estimate. The same is true if vice versa.

Question 9

Present Value Measure

Answer 9

Ans:
The result should be as close as possible to fair value if such a value could be obtained

The expected cash flow approach is preferred because present value measurements should reflect the uncertainties inherent in the estimated cash flows

Question 10

Capture Economic Differences

Answer 10

Ans:

1) 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 11

The traditional approach ( discounted cash flows)

Answer 11

It uses the interest rate to capture all the uncertainties and risks inherent in a cash flow measure. It has 2 - 5 factors of capture economic differences.

Question 12

Expected Cash Flow Approach

Answer 12

A risk free rate as the discount rate. That is, 2-5 factors of capture economic differences that are incorporated into the risk adjusted expected cash flow and the discount factor is the risk free rate.

Question 13

Expected Cash flow Approach

Answer 13

The expected cash flow approach uses expectations about all possible cash flows instead of a single most likely cash flow. Both uncertainty as to timing and amount can be incorporated into calculation