FAR - Conceptual Framework of Financial Reporting Flashcards
What are the primary qualitative characteristics of financial information?
There are TWO:
- Relevance
- Faithful Representation
List the ingredients for Relevance
There are THREE:
- Predictive Value
- Confirming Value
- Material
Define: Predictive Value
Provides information that assists users to form expectations of performance about future events
Define: Confirmatory Value
Information either confirms or changes expectations, past or present, based on previous evaluations
Define: Materiality
The information will significantly impact the user’s decision.
NOTE: Materiality is entity specific and somewhat pervasive throughout the financial as a whole
List the ingredients of Faithful Representation
There are THREE:
- Completeness
- Neutrality
- Free from Error
Define: Completeness
The information includes all data necessary to faithfully represent the financial position for the users
Define: Neutrality
The information is free from bias
Define: Free from Error
The information is truthful and free from errors
List the Enhancing Qualitative Characteristics for financial information
There are FOUR that apply to both primary components:
- Comparability
- Verifiability
- Timeliness
- Understandability
What is The Entity Assumption?
The assumption is that there is a separate accounting entity for each business organization.
The owners and the corporation are separate.
Define: The Going-Concern Assumption
The assumption that the entity has an indefinite life - they will continue to be GOING Concern. Report Assets & Liabilities at current value and NOT liquidation or exit values
Define: Time-Period Assumption
The indefinite life is further broken into smaller time frames: a year, a quarter, monthly
Define: Unit of Measure
Account balances are measured in terms of monetary value to identify true purchasing power
Define: Revenue
Revenue is the utilization of assets or the extinguishment of liabilities
When are revenues recognized versus realized?
Revenue is recognized in the financial statements when the entity completes its performance. It is earned and collectability is reasonably assured.
Revenue is realized when cash is received for the entity completing its performance.
What is the key Constraint in the FASB Conceptual Framework?
Cost vs Benefit: GAAP limits recognition and disclosure if the cost providing the information exceeds its benefit
When using the two approaches to computing present value, where is the risk applied?
The risk and uncertainty are incorporated into EITHER the discount rate OR the cash flows - - NOT BOTH!
