Week 2 Chapter 2 Flashcards
Conceptual Framework
Establishes concepts that underlie financial reporting
Comparability
Quality of information
Permits users to identify similarities/differences between sets of economic phenomena
Timeliness
Having information available to users before it loses its capacity to influence decisions.
Predictive Value
Value used by investors to form their own expectations about the future
Relevance
Information that is capable of making a difference in the decisions of users in their capacity as capital providers.
Neutrality
Absence of bias intended to attain a predetermined result or to induce a particular behavior.
Faithful Representation
Quality of information that assures users that information represents the economic phenomena that it purports to represent.
Free From Error
The extent to which information is accurate in representing the economic substance of a transaction.
Confirmatory Value
Helps users confirm or correct prior expectations
Completeness
Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.
Understandability
Quality of information that allows users to comprehend its meaning.
Comprehensive Income
Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
What 2 principles does cash-basis accounting ignore?
- Revenue recognition principle
2. Expense recognition principle
Can cash basis financial statements be in conformity with GAAP?
No, because they ignore the revenue recognition principle and the expense recognition principle
Modified Cash Basis
Based on cash basis, but with modifications for assets and inventory that follow accrual basis. Often used by professional service firms, retail, real estate, and agricultural operations.
What is the rebuttal to “cash is the real bottom line” when considering cash vs accrual basis?
In today’s economy, credit is the real bottom line (not cash). Also, decision-makers seek information about a company’s future cash flows.
What are the 3 characteristics of Faithful Representation?
Completeness
Neutrality
Free from Error
What are the 3 characteristics of Relevance?
Predictive Value
Confirmatory Value
Materiality
What are the 2 Fundamental Qualities that make accounting information useful for decision making?
Relevance
Faithful Representation
What are the 4 Enhancing Qualities that make accounting information useful for decision making?
Comparability
Verifiability
Timeliness
Understandibility
4 Assumptions of accounting structure
Economic Entity Assumption
Going Concern Assumption
Monetary Unit Assumption
Economic Entity Assumption
Company keeps its activity separate and distinct from its owners and any other business unit
Going Concern Assumption
A company will have a long life
Monetary Unit Assumption
Money is the common denominator of economic activity. Ignores inflation/deflation.
Periodicity Assumption
A company can divide its activities into artificial time periods (monthly, quarterly, yearly)
4 Principles of accounting
Measurement
Revenue Recognition
Expense Recognition
Full Disclosure
Measurement Principle
Measurement of transactions based on either the Historical Cost of Fair Value
Revenue Recognition Principle
Requires that companies recognize revenue in the accounting period in which the obligation is satisfied
Expense Recognition Principle
Requires that expenses are recognized with the revenue they are tied to
Full Disclosure Principle
Practice of providing information of sufficient importance to influence judgement/decisions of an informed user
What are the 2 types of Measurement Principles? Which is verifiable?
Historical Cost Principle - verifiable
Fair Value Principle
What Principle is used to report many assets and liabilities on the balance sheet, and why?
Historical Cost Principle, because it is verifiable
What is the market-based principle defined as the price that would be received to sell an asset or transfer a liability?
Fair Value Principle
Cost Constraint
Benefits perceived to be derived from informational reporting but exceed the costs associated with it
Level of Conceptual Framework devoted to elements of financial statements and qualitative characteristics
2nd
Level of Conceptual Framework devoted to the “why” or objective of accounting
1st
Level of Conceptual Framework devoted to the “how”, including principles/assumptions/constraints, of accounting
3rd
