FAR 1 part A Flashcards
FAR studies
CONCEPTUAL FRAMEWORK: LEVEL 1
The basic OBJECTIVE of financial reporting is to provide info about the entity that is useful to the present and potential debt and equity lenders or investors, based on the needs of users or stakeholders.
CONCEPTUAL FRAMEWORK: LEVEL 2
QUALITATIVE CHARACTERISTICS of accounting info (SFAC 8) involve both…
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
ENHANCING QUALITATIVE CHARACTERISTICS
CONCEPTUAL FRAMEWORK: LEVEL 2
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
(01) RELEVANCE, relevant info is capable of making a difference in a user’s decision. Financial info is relevant if the info has…
(a) PREDICTIVE VALUE, requiring that info is used to predict future outcomes
(b) CONFIRMATORY VALUE, requiring that info either confirms or changes prior evaluations
(c) MATERIALITY, an item is material if omitting or misstating it could influence a user’s decision
(02) FAITHFUL REPRESENTATION, info has the quality of faithful representation if the info depicts what it purports to represent. A faithful representation should be…
(a) COMPLETE, requiring that info is presented or depicted om a way users can understand
(b) NEUTRAL, requires that the item is depicted without bias either favorably or unfavorably
(c) FREE FROM ERROR, means there are no errors or omissions in the info reported
CONCEPTUAL FRAMEWORK: LEVEL 2
ENHANCING QUALITATIVE CHARACTERISTICS
ENHANCING QUALITATIVE CHARACTERISTICS of accounting info include…
(01) COMPARABILITY enables users to identify and understand similarities and differences between items
- Consistency helps achieve comparability
(02) VERIFIABILITY, occurs when different sources reach agreement on an amount of representation of an item
(03) TIMELINESS, requires that info is available to a user when it is useful
(04) UNDERSTANDABILITY, involves classifying, characterizing, and presenting info clearly and concisely
CONCEPTUAL FRAMEWORK: LEVEL 2
ELEMENTS of financial statements are the ten basic building blocks from which financial statements are constructed. In order to be included in the statements, an item must qualify as an element, meet recognition criteria, and be measurable
(01) Assets
(02) Liabilities
(03) Equity
(04) Owner Investments
(05) Owner Distributions
(06) Comprehensive Income
(07) Revenues
(08) Expenses
(09) Gains
(10) Losses
CONCEPTUAL FRAMEWORK: LEVEL 3
UNDERLYING ASSUMPTIONS, assumptions of accounting info and underlying the financial accounting structure include…
- BUSINESS OR ECONOMIC ENTITY ASSUMPTION, which presumes that transactions can be identified with a particular firm or entity, separable from other entities (EXAMPLE: department, division, subsidiary, and firm)
- GOING CONCERN ASSUMPTION, which presumes the firm to have an unlimited or long life. This assumption justifies the use of Historical Cost.
- If we assumed that the firm was about to fail or liquidate, the financial statements would be more useful if adjusted to liquidation or NRV and recording depreciation, depletion, or amortization expenses would serve no purpose.
- The FV of an asset is irrelevant if a company is a going concern and the company needs the asset to operate. Another reason to use Historical Cost instead of FV
- MONETARY UNIT ASSUMPTION, which assumes that US firms and their use of the US dollar is justified as this monetary unit is relevant, easy to use, universally available, understandable, and therefore useful.
- Price-level changes from inflation and deflation are ignored under this assumption.
- PERIODICITY (TIME) ASSUMPTION, which allows for economic positions and results to be divided into artificial time periods.
CONCEPTUAL FRAMEWORK: LEVEL 3
PRINCIPLES OF ACCOUNTING INFORMATION, used to record transactions include…
- SFAC 5 uses five different attributes to measure assets and liabilities in present practice…
(01) HISTORICAL COST PRINCIPLE
(02) REPLACEMENT (CURRENT) COST PRINCIPLE,
(03) FAIR VALUE PRINCIPLE,
(04) NET REALIZABLE VALUE PRINCIPLE,
(05) PRESENT (OR DISCOUNTED) VALUE OF FUTURE CASH FLOWS PRINCIPLE,
- SFAC 5 uses five different attributes to measure assets and liabilities in present practice…
(01) HISTORICAL COST PRINCIPLE
under US GAAP continues to require that most assets and liabilities be accounted for and reported at cost.
- Property, plant, and equipment and most inventories are reported at their historical cost.
- Liabilities that involve obligations to provide goods or services are generally reported at historical proceeds (Which is the amount of cash or cash equivalents received when the obligation was incurred).
- SFAC 5 uses five different attributes to measure assets and liabilities in present practice…
(02) REPLACEMENT (CURRENT) COST PRINCIPLE
amount of cash or cash equivalents that would be paid if the same or an equivalent asset were acquired currently.
- Some inventories are reported at their replacement costs.
- SFAC 5 uses five different attributes to measure assets and liabilities in present practice…
(03) FAIR VALUE PRINCIPLE
amount of cash or cash equivalents that could be obtained by selling an asset in orderly liquidation.
- Some investments in marketable securities are reported at their current market value.
- Fair value is also generally used for assets expected to be sold at prices lower than previous carrying amounts.
- Some liabilities that involve marketable commodities and securities are reported at FV.
- SFAC 5 uses five different attributes to measure assets and liabilities in present practice…
(04) NET REALIZABLE VALUE PRINCIPLE
nondiscounted amount of cash and cash equivalents into which an asset is expected to be converted in due course of business less direct costs.
- Short term receivables and some inventories are reported at their NRV.
- Liabilities that involve known or estimated amounts of money payable at unknown future dates are generally reported at their net settlement value (Which is the nondiscounted amount of cash expected to be paid to liquidate an obligation in the due course of business including direct cost to make that payment).
- Such as trade payables or warranty obligations.
- SFAC 5 uses five different attributes to measure assets and liabilities in present practice…
(05) PRESENT (OR DISCOUNTED) VALUE OF FUTURE CASH FLOWS PRINCIPLE
present value of future cash inflows into which an asset is expected to be converted in due course of business less present values of cash outflows necessary to obtain those inflows.
- Long term receivables are reported at their present or discounted value.
- Long term payables are reported at their present or discounted value.
REVENUE RECOGNITION PRINCIPLE provides guidance on when revenues are to be recorded. Revenue is recognized when EARNED and REALIZED.
- Revenue is earned when services are provided or the ownership of goods is transferred.
- Is not dependent on cash receipt, a sale may be made on credit terms.
- Is measured at the FMV of cash and other consideration received.
- Revenue is realizable when related assets received or held are readily convertible to cash or claims to cash. Realization is the process of converting noncash resources into money and is used in financial reporting to refer to sales of assets for cash or claims to cash.
- MATCHING PRINCIPLE
requires that the expense follow or be matched with the revenue. It is helpful to classify cost as PRODUCT (EXAMPLE: Direct Material, Direct Labor, and Manufacturing Overhead) and PERIOD (non-product) costs, when applying the matching principle.
FULL DISCLOSURE
principle requires that footnotes and supplemental information be provided in addition to the basic financial statements.
