Week 1: conceptual framework

Question 1

objective of financial reporting

Answer 1

provide financial information that is decision useful to existing and potential investors, lenders and other creditors

-solution: financial information is provided by general purpose financial systems (not customized to individual users)

Question 2

2 fundamental qualitative characteristics of accounting informations

Answer 2

-relevance
-faithful representation

Question 3

relevance

Answer 3

-information has relevance if it makes a difference in user’s decisions
-may have predictive value and/or confirmatory value
-materiality is important; will information influence the decisions of users

Question 4

faithful representation

Answer 4

-information should reflect economic reality
-it must be complete, neutral, and free from material error

Question 5

4 enhancing qualitative characteristics of useful information

Answer 5

-verifiability
-comparability
-understandability
-timeliness (V-vut)
-subject to: cost constraint

Question 6

key underlying assumptions of accounting

Answer 6

-going concern
-time period
-stable monetary unit

Question 7

going concern assumption (on-going entity)

Answer 7

accountants assume that business will continue operating in the foreseeable future

Question 8

time period assumption

Answer 8

business activities can be divided into artificial time periods (eg, fiscal year)

Question 9

stable monetary unit

Answer 9

in most developed countries, accountants ignore inflation issues

Question 10

5 elements of financial statements

Answer 10

-revenues (IS)
-expenses (IS)
-assets (SFP)
-liabilities (SFP)
-equity (SFP)

Question 11

measurement of the elements of financial statements

Answer 11

principles describe when/how the elements should be
-recognized/identified
-measured
-recorded (bookkeeping)
-reported

-big question here is do you use “historic cost” or some version of “current value”? in general, accountants use historic cost