FAR - Conceptual Framework of Financial Reporting

Question 1

What are the primary qualitative characteristics of financial information?

Answer 1

There are TWO:

1. Relevance
2. Faithful Representation

Question 2

List the ingredients for Relevance

Answer 2

There are THREE:

1. Predictive Value
2. Confirming Value
3. Material

Question 3

Define: Predictive Value

Answer 3

Provides information that assists users to form expectations of performance about future events

Question 4

Define: Confirmatory Value

Answer 4

Information either confirms or changes expectations, past or present, based on previous evaluations

Question 5

Define: Materiality

Answer 5

The information will significantly impact the user’s decision.

NOTE: Materiality is entity specific and somewhat pervasive throughout the financial as a whole

Question 6

List the ingredients of Faithful Representation

Answer 6

There are THREE:

1. Completeness
2. Neutrality
3. Free from Error

Question 7

Define: Completeness

Answer 7

The information includes all data necessary to faithfully represent the financial position for the users

Question 8

Define: Neutrality

Answer 8

The information is free from bias

Question 9

Define: Free from Error

Answer 9

The information is truthful and free from errors

Question 10

List the Enhancing Qualitative Characteristics for financial information

Answer 10

There are FOUR that apply to both primary components:

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 11

What is The Entity Assumption?

Answer 11

The assumption is that there is a separate accounting entity for each business organization.

The owners and the corporation are separate.

Question 12

Define: The Going-Concern Assumption

Answer 12

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

Question 13

Define: Time-Period Assumption

Answer 13

The indefinite life is further broken into smaller time frames: a year, a quarter, monthly

Question 14

Define: Unit of Measure

Answer 14

Account balances are measured in terms of monetary value to identify true purchasing power

Question 15

Define: Revenue

Answer 15

Revenue is the utilization of assets or the extinguishment of liabilities

Question 16

When are revenues recognized versus realized?

Answer 16

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.

Question 17

What is the key Constraint in the FASB Conceptual Framework?

Answer 17

Cost vs Benefit: GAAP limits recognition and disclosure if the cost providing the information exceeds its benefit

Question 18

When using the two approaches to computing present value, where is the risk applied?

Answer 18

The risk and uncertainty are incorporated into EITHER the discount rate OR the cash flows - - NOT BOTH!