F1.1 Standards and Conceptual Framework Flashcards
Primary users of FS
Investors, Creditors, Lenders; not regulators
Fundamental qualitative characteristics of useful financial information
Relevance and faithful representation
FASB, process of reporting an item in FS of an entity
Recognition, SFAC 5 para. 6
Financial info. in general purposes financial reports does NOT include
How effectively and efficiently the entity’s shareholders’ have discharged their responsibility to use entity’s resources
US public company needs guidances on complex derivative transaction, most likely find appropriate guidance
FASB Accounting Standards Codification is single source of GAAP. US public companies are required to follow US GAAP.
SFAC 7, five elements of present value (or economic value) measurement used to establish the value of assets or liabilities using cash flow information
Risk Tolerance of Management is not one of the elements.
SFAC the following elements of present value measurement:
The Price of Bearing Uncertainty
Expectations about Timing Variations of Future Cash Flows
Other Factors (e.g., Liquidity Issues and Market Imperfections)
Time Value of Money (Risk-free Rate of Interest)
Estimate of Future Cash Flow
Completeness is ingredient of:
Faithful representation, not relevance.
Faithful representation - completely neutral free from error (completeness, neutrality, and freedom from error)
Managerial v. Financial Accounting
Public companies must follow GAAP for external financial reporting purposes. GAAP need not be followed for (internal) managerial accounting purposes
Predictive value
Quality of info. helps users forecast future outcomes is predictive value. Forecasting is predicting.
Confirming value
Provides feedback about evaluations previously made by users
Faithful representation
Financial information faithfully represents the reported economic phenomena.
Neutrality
Depiction of financial information that is free from bias in selection or presentation
Enhancing characteristic of faithful representation and relevance
Timeliness is a characteristic that enhances the usefulness of information that is relevant and faithfully represented. Interim FS emphasize timeliness by providing financial info. based on actual performance to date and estimates prior to year end.
Relevance
Confirming value, predictive value, and materiality. To be relevant, information should have predictive value and/or confirming value, and must be material
Money (Monetary unit)
money is the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis
Replacement cost
Amount of cash or its equivalent that would be paid to acquire or replace an asset currently. RC is an acquisition cost.
Operating procedure for issuing FASB Accounting Standards Update
Acct. Std. Update is issued only after a majority vote by the members of FASB.
Most authoritative source of US GAAP
FASB Accounting Standards Codification is single source of authoritative nongovernmental US GAAP
Documents typically issued part of due-process activities of FASB for amending FASB Accounting Standards Codification
A proposed accounting standards update is prepared by FASB as part of the due-process activities
Measurement basis to use to dispose assets within 3 months or less
Net realizable value is appropriate measurement basis because decision to end operations and quickly (3 months) dispose of its assets
Intermin financial reporting
Viewed as reporting for an integral part of an annual period
Essential characteristic of an asset
Asset provides future benefits, assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Revenue may result
Revenues are inflows or other enhancements of assets and/or settlements (decreases) in liabilities resulting from the entity’s ongoing major operations, not from “incidental” operations
Royalties paid should be reported as an expense
In the period incurred
Equity
Assets - Liabilities = Equity, is residual interest in the assets of a company that remains after deducting its liabilities
Primary objective of financial reporting
Provide information that is useful for economic decision making
FASB amends Accounting Standards Codification through issuance of
Accounting Standards Updates
