Lecture 2

Question 0

What is the conceptual framework a basis for?

Answer 0

Basic account theory for solving new and emerging practical problems of reporting

Question 1

Why is a conceptual framework useful?

Answer 1

• it’s like a constitution, gives a “coherent solution of interrelated objectives”
• Aids in the creation of standards for accounting
• increases financial statement users understanding of and confidence in financial reporting
• enhances comparability of financial statements of different companies

Question 2

Describe the triangle for the framework of financial reporting

Answer 2

Top: objectives of financial reporting (the “why” goals and purposes of accounting)
The middle: qualitative characteristics of accounting information AND the elements of financial statements
The bottom: foundation of accounting principles and conventions… The “how” implementation

Question 3

What did the Trueblood committee decide in the 1970’s?

Answer 3

The overall objective of accounting is to provide:

1. Information useful to users
2. Decision relevant information (I.e. Resource allocation)

Question 4

What are resource allocation decisions assumed to include?

Answer 4

An assessment of management stewardship, that is a management role in maximizing shareholder value.

Question 5

From the triangle: what are the fundamental qualitative characteristics? And describe them

Answer 5

1. Relevance: includes material (relevant) information and has predictive and feedback/confirmatory value
2. Representational faithfulness: complete, neutral, free from error, substance over form

Question 6

What are the Enhancing Qualitative Characteristics? And define them.

Answer 6

1. Comparability: allows user to identify real economic similarities and differences
2. Verifiability: similar results achieved if same methods are used (consensus)
3. Timeliness
4. Understandability: allows for reasonably informed users to see the significance of the information, provides information to be clear

Question 7

What is a trade off?

Answer 7

When one qualitative characteristic is sacrificed for another

Question 8

What are some constraints of qualitative characteristics?

Answer 8

Materiality: if leaving or including information would influence/ change the judgement of a reasonable person, then that information is considered material
Cost versus benefits: benefits of using that information should outweigh the costs of providing it

Question 9

List the elements of financial statements

Answer 9

Assets
Liabilities
Equity
Revenues
Expenses
Gains 
Losses

Question 10

What are the three key characteristics of assets?

Answer 10

1. They involve economic benefit to the entity
2. entity has a control over that benefit
3. Benefit results from a past transaction or even

Question 11

What are the three key characteristics of Liabilities?

Answer 11

1. Represent a duty or responsibility
2. Entity is obligated and has little or no discretion to avoid the duty or responsibility
3. Obligation results from a past transaction or event

Question 12

Describe equity

Answer 12

It represents residual interest in assets, after all liabilities are deducted