Financial Reporting Concepts

Question 1

list

According to the FASB conceptual framework, useful information should posses what qualities

financial reporting concepts

Answer 1

relevance;
faithful representation

financial reporting concepts

Question 2

define

relevance

Conceptual Framework

Answer 2

Information is considered relevant if it provides information that has predictive value about the future, and;
has cofirmatory value

Conceptual Framework

Question 3

define

confirmatory value

Conceptual Framework (relevance)

Answer 3

confirms or corrects prior expectations

Conceptual Framework (relevance)

Question 4

define

materiality

Conceptual Framework (relevance)

Answer 4

Materiality is a company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor

Conceptual Framework (relevance)

Question 5

define

faithful representation

Conceptual Framework

Answer 5

means that information accurately depicts what really happened. Information must be:
complete,
neutral, and
free from error

Conceptual Framework

Question 6

list

enhancing qualities of useful information

Conceptual Framework

Answer 6

comparability;
consistency;
verifiable;
timeliness;
understandability

Conceptual Framework

Question 7

Define

comparability

FASB enhancing qualities

Answer 7

when different companies use the same accounting principles

FASB enhancing qualities

Question 8

Define

consistency

FASB enhancing qualities

Answer 8

means that a company uses the same accounting principles and methods from year to year

FASB enhancing qualities

Question 9

define

verifiability

FASB enhancing qualities

Answer 9

means if independent observers, using the same methods, would obtain similar results

FASB enhancing qualities

Question 10

Define

timeliness

FASB enhancing qualities

Answer 10

It must be available to decision-makers before it loses its capacity to influence decisions

FASB enhancing qualities

Question 11

define

understandability

FASB enhancing qualities

Answer 11

means it is presented in a clear and concise fashion so that reasonably informed users of that information can interpret it and comprehend its meaning

FASB enhancing qualities

Question 12

Define

Monetary Unit Assumption

Assumptions in Financial Reporting

Answer 12

assumption requires that only those things that can be expressed in money are included in the accounting records.

Assumptions in Financial Reporting

Question 13

Define

Economic Entity Assumption

Assumptions in Financial Reporting

Answer 13

states that every economic entity can be separately identified and accounted for in order to assess a companys performance and financial position accurately

Assumptions in Financial Reporting

Question 14

Describe

Time Period Assumption

Assumptions in Financial Reporting

Answer 14

states that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business

Assumptions in Financial Reporting

Question 15

Define

Going Concern Assumption

Assumptions in Financial Reporting

Answer 15

states that the business wil remain in operation for the foreseeable future

Assumptions in Financial Reporting

Question 16

Define

Historical Cost Principle

Principles in Financial Reporting

Answer 16

dictates that companies record assets at their cost;
this is true not only at the time the asset is purchased

Assumptions in Financial Reporting

Question 17

Define

Fair Value Principle

Assumptions in Financial Reporting

Answer 17

indicates that assets and liabilties should be reported at fair value

Assumptions in Financial Reporting

Question 18

Define

Revenue Recognition Principle

Assumptions in Financial Reporting

Answer 18

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

Assumptions in Financial Reporting

Question 19

Define

Expense Recognition Principle

Assumptions in Financial Reporting

Answer 19

Dictates that companies recognize expenses in the period in which they make efforts to generate revenue

Assumptions in Financial Reporting

Question 20

Define

Full Disclosure Principle

Assumptions in Financial Reporting

Answer 20

• Requires that companies disclose all circumstances and events that would make a difference to financial statement users.
• If an important item cannot reasonably be reported directly in one of the four types o financial statements, then it should be discussed in notes that accompany the statements

Assumptions in Financial Reporting

Question 21

Describe

the cost constraint

Assumptions in Financial Reporting

Answer 21

It weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Assumptions in Financial Reporting

Question 22

Define

Deferrals

Adjusting the Accounts

Answer 22

Are either prepaid expenses or unearned revenues.

Adjusting the Accounts

Question 23

Define

Accruals

Adjusting the Accounts

Answer 23

• Are either accrued revenues or accrued expenses.
• Companies make adjusting entries for accruals to record revenues for services performed and expenses incurred in the current accounting that have not been recognized through dailiy entries.

Adjusting the Accounts