Objectives and Qualitative Characteristics

Question 1

What is considered as the conceptual framework for Financial Accounting?

Answer 1

FASB Statements of Financial Accounting Concepts

Question 2

What is the “constitution for developing specific GAAP?

Answer 2

FASB Statements of Financial Accounting Concepts (The conceptual Framework)

Question 3

List the parts of the conceptual Framework

Answer 3

1. )Objective of Financial Reporting
2. ) Qualitative characteristics of accounting information
3. ) Accounting Assumptions
4. ) Basic Accounting Principles
5. ) Cost Constraint
6. ) Elements of Financial Statements

Question 4

What is the objective of general purpose financial reporting?

Answer 4

To Provide information about the entity that is useful to current and future investors and creditors in making decisions as capital providers

Question 5

What useful information does General Purpose Financial Reporting provide to investors and creditors?

Answer 5

1. ) The amount, timing, and uncertainty of an entity’s cash flows.
2. ) Ability of the entity to generate future net cash inflows
3. ) An entity’s economic resources (assets) and claims to those resources (liabilities) which provides insight into the entity’s financial strengths and weaknesses.and it’s liquidity and solvency.
4. ) The effectiveness with which management has met it’s stewardship responsibilities
5. ) The effect of transactions and other events that change an entity’s economic resources and it’s claim to those resources.

Question 6

What are the two primary qualitative characteristics for financial statement information to be useful?

Answer 6

1. ) Relevance - Predictive and confirmatory value, and materiality
2. ) Faithful Representation - Completeness, neutrality, free from error.

Question 7

In addition to the two primary qualitative characteristics when dealing with financial statement usefulness, what 4 enhancing characteristics should be present?

Answer 7

1. ) Comparability - The quality of information that enables users to identify similarities and differences between sets of information. Consistency in application of recognition and measurement methods over time enhances comparability.
2. ) Verifiability - Verifiable if independent observers could reach similar conclusions based on the information.
3. ) Timeliness - Information received in time to make a difference to the decision maker.
4. ) Understandability - If the user comprehends it within the decision context at hand.

Question 8

For information to be useful in decision-making, what two characteristics should it have?

Answer 8

It must be both relevant and a faithful representation of the economic phenomena it represents

Question 9

How is relevance defined?

Answer 9

Information is relevant if it makes a difference to decision makers in their role as capital providers. Information is relevant when it has predictive value, confirmatory value, or both.

Question 10

What are the three components of relevance?

Answer 10

1. ) Predictive Value - Has this if it assists capital providers in forming expectations about future events
2. ) Confirmatory Value - Information has this if it confirms or changes past (or present) expectations based on previous evaluations.
3. ) Materiality - Information that is material will impact a user’s decision. The FASB believes that materiality is entity specific and that material information is relevant to the decision maker.

Question 11

How is faithful representation defined?

Answer 11

Information is reported faithfully when the reported measure and the condition or situation are in agreement. Information is representationally faithful when it is complete, neutral, and free from material error. This replaces Reliability as a primary qualitative characteristic

Question 12

What are the three components of Faithful representation?

Answer 12

1. ) Completeness - Information is complete if it includes all data necessary to be faithfully representative
2. ) Neutral - Information is free from any bias intended to attain a prespecified result, or to encourage or discourage certain behavior
3. ) Free from error - when there are no emissions or errors

Question 13

Can relevance and faithful representation conflict?

Answer 13

Yes, in such cases a trade-off is made favoring one or the other.

Question 14

What are enhancing characteristics?

Answer 14

Complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is relevant and faithfully represented

Question 15

What is comparability? (Enhancing characteristic)

Answer 15

Quality of information that enables users to identify similarities and differences between sets of information. Consistency in application of recognition and measurement methods over time enhances comparability

Question 16

What is verifiability? (Enhancing characteristic)

Answer 16

Information is verifiable if different knowledgable and independent observers could reach similar conclusions based on information

Question 17

What is timeliness? (Enhancing characteristic)

Answer 17

Information is timely received in time to make a difference to the decision maker

Question 18

What is understandability? (Enhancing characteristic)

Answer 18

The user must be able to comprehend information within the decision context at hand.

Question 19

What characteristic is a part of Faithful Representation and Relevance?

Answer 19

Comparability