FAR - Framework/Overview - FASB, Conceptual Framework of Financial Reporting, Objectives/Qualitative Characteristics

Question 1

how many primary qualitative characteristics and how many enhancing qualitative characteristics?

Answer 1

2 primary: 1) relevance 2) faithful Representation

4 enhancing: 1) comparability, 2) verifiability, 3) understandability, 4) timeliness

Question 2

Conceptually, interim financial statements can be described as emphasizing:

Answer 2

• Interim reporting emphasizes timeliness over faithful representation
• more aggregate and reflect estimates
• provide reasonable information in a timely fashion, rather than exact information

Question 3

What is the conceptual framework intended to establish?

Answer 3

• “constitution” for developing acct principles

- concepts statements are not GAAP, however.

Question 4

During the period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about:

Answer 4

• info about the performance and financial position of the enterprise

Question 5

What is the underlying concept that supports estimating a fixed asset impairment charge?

Answer 5

An estimate of an impairment charge to a fixed asset can only be a faithful representation.

Question 6

What are the Statements of Financial Accounting Concepts (SFAC) intended to establish?

Answer 6

• establish a framework from which financial accounting and reporting standards could be developed
• provide the theory behind accounting and reporting and provide guidance when no GAAP exists.
• SFAC are not included as GAAP.

Question 7

TRUE/FALSE

A firm has income of exactly zero for a year during which both specific and general prices (inflation) have increased. The firm maintained its capital under the financial concept of capital maintenance.

Answer 7

TRUE

Capital was maintained as the firm had positive earnings for the year -> NOT NEGATIVE

Question 8

TRUE/FALSE

A manager uses a company car for both business and personal use. Therefore, the car should not be included among the firm’s assets.

Answer 8

FALSE

Car should still be included among firm’s assets.

Question 9

TRUE/FALSE

If the going concern assumption were not met, adherence to the historical cost principle would continue to be appropriate.

Answer 9

FALSE

If business fails going concern assumption, value of assets will be fair value not market subject to liquidation

Question 10

firm has negative income for a period. Has the firm experienced a return on capital?

Answer 10

No

Return on capital is when the firm has resources leftover in addition of which can be distributed as dividends.

Question 11

an entity’s revenue may result from

Answer 11

Increase in Asset OR Decrease in liability from primary operations

• revenues are inflows of assets or settlements of liabilities
  (1) arise from a company’s primary earnings activities and (2) are recurring or continuing in nature

Question 12

parent-sub exists, consolidated financials are prepared in recognition of the accounting concept of:

Answer 12

Economic Entity

Consolidated financials - example, comprises more than one legal entity

Question 13

assets reported in financials at amount of cash/its equivalent that would have to be paid if the same or equivalent assets were acquired currently.

What is the reporting concept?

Answer 13

Replacement cost.

Amount to be paid for an item at the current time.

used in the LCM inventory valuation procedure.

Example of an entry price-the amount required to be paid currently to obtain an asset already held.

Question 14

Reporting inventory at LCM is a departure from the accounting principle of:

Answer 14

Historical Cost

-LCM departs from historical cost b/c it provides an ending valuation below cost when FMV

Question 15

A estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions.

concept of?

Answer 15

Matching

• matching principle requires that we recognize and match expenses with the revenues generated.
• cost of those uncollectible accounts is matched in the period that the revenue is recognized.

Question 16

On December 31, 2002, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 2002, the net realizable value of the equipment was below historical cost.

What is the appropriate measurement basis for equipment included in Brooks’ December 31, 2002, Balance Sheet?

Answer 16

When a firm is in liquidation, historical cost and entry values (replacement cost) are no longer relevant.

• going concern assumption supports historical cost principle. firm is no longer a going concern.
• only amounts relevant are the amounts to be received on sale of the assets. NRV = net value to be received, after costs of getting the asset ready for sale are deducted.

Question 17

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

Answer 17

1) An estimate of future cash flows,
2) Expectations about variations in amount/timing of CFs
3) Time value of $ measured by risk-free rate of interest,
4) price for bearing uncertainty inherent in asset/liability,
(5) Any other relevant factors.

Question 18

What is conservatism?

Answer 18

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

Question 19

What does a fresh start measurement do?

Answer 19

• 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 20

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

Answer 20

(1) Balance sheet, (2) Income statement, (3) Statement of comprehensive income, (4) Statement of cash flows, (5) Statement of owner’s equity.

Question 21

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

Answer 21

Definition, Measurability, Relevance, Reliability.

Question 22

A firm has reported a 20% increase in earnings for the past three years. To dampen investor expectations, it has decided to understate revenues and overstate expenses. Is this an appropriate application of the conservatism constraint

Answer 22

NO

Question 23

What is the underlying concept governing GAAP pertaining to recording gain contingencies?

Answer 23

• Gain contingencies not recognized, but loss contingencies that are probable and estimable are recognized.
• conservatism, which suppresses positive information under conditions of uncertainty but requires the reporting of negative information when the negative outcome is likely.

Question 24

FASB conceptual framework, which of the following attributes would not be used to measure inventory?

Answer 24

PV of future cash flows

five different attributes are used to measure assets and liabilities in present practice:

1) historical cost, (LCM)
2) current (replacement) cost (LCM)
3) current market value,
4) net realizable value (LCM)
5) present value of future cash flows.- not inventory

Question 25

the most relevant measurement of an entity’s liabilities at initial recognition and fresh-start measurements should always reflect

Answer 25

The credit standing of the entity.

Question 26

Using cash flow info and PV in acct measurement, 3 methods covered?

Answer 26

1) measurements at initial recognition
2) interest method of amortization
3) expected cash flow approach

Question 27

Objective of using PV in acct measurement?

Answer 27

to capture, to the extent possible, the economic difference between sets of future cash flows. The objective of present value, when used in accounting measurements at initial recognition and fresh-start measurements, is to estimate fair value.