FAR - FASB - Conceptual Framework of Financial Reporting by Business Enterprises - Constraints and Present Value

Question 1

List the elements which a present value measurement that fully captures economic differences should include.

Answer 1

(1) An 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 2

What are the four criteria that must be met to be recognized and measured in a financial report?

Answer 2

Definition; Measurability; Relevance; Reliability.

Question 3

What is Conservatism?

Answer 3

Conservatism (also called prudence) is the reporting of less optimistic amounts (lower income, net assets) under conditions of uncertainty or when GAAP provides a choice from among recognition or measurement methods.

Question 4

List the elements included in a full set of financial statements.

Answer 4

Balance sheet, income statement, statement of comprehensive income, statement of cash flows, statement of owner’s equity.

Question 5

What does a fresh start measurment do?

Answer 5

Establishes a new carrying value after an initial recognition and is unrelated to previous amounts (e.g., mark-to-market accounting and recognition of asset impairments).

Question 6

Define cost effectiveness.

Answer 6

This constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 7

What is Cost Effectiveness?

Answer 7

This constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 8

What is the constraint to setting accounting standards?

Answer 8

Cost effectiveness (or cost-benefit).