Week 2 Chapter 2

Question 1

Conceptual Framework

Answer 1

Establishes concepts that underlie financial reporting

Question 2

Comparability

Answer 2

Quality of information

Permits users to identify similarities/differences between sets of economic phenomena

Question 3

Timeliness

Answer 3

Having information available to users before it loses its capacity to influence decisions.

Question 4

Predictive Value

Answer 4

Value used by investors to form their own expectations about the future

Question 5

Relevance

Answer 5

Information that is capable of making a difference in the decisions of users in their capacity as capital providers.

Question 6

Neutrality

Answer 6

Absence of bias intended to attain a predetermined result or to induce a particular behavior.

Question 7

Faithful Representation

Answer 7

Quality of information that assures users that information represents the economic phenomena that it purports to represent.

Question 8

Free From Error

Answer 8

The extent to which information is accurate in representing the economic substance of a transaction.

Question 9

Confirmatory Value

Answer 9

Helps users confirm or correct prior expectations

Question 10

Completeness

Answer 10

Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.

Question 11

Understandability

Answer 11

Quality of information that allows users to comprehend its meaning.

Question 12

Comprehensive Income

Answer 12

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.

Question 13

What 2 principles does cash-basis accounting ignore?

Answer 13

1. Revenue recognition principle

2. Expense recognition principle

Question 14

Can cash basis financial statements be in conformity with GAAP?

Answer 14

No, because they ignore the revenue recognition principle and the expense recognition principle

Question 15

Modified Cash Basis

Answer 15

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.

Question 16

What is the rebuttal to “cash is the real bottom line” when considering cash vs accrual basis?

Answer 16

In today’s economy, credit is the real bottom line (not cash). Also, decision-makers seek information about a company’s future cash flows.

Question 17

What are the 3 characteristics of Faithful Representation?

Answer 17

Completeness
Neutrality
Free from Error

Question 18

What are the 3 characteristics of Relevance?

Answer 18

Predictive Value
Confirmatory Value
Materiality

Question 19

What are the 2 Fundamental Qualities that make accounting information useful for decision making?

Answer 19

Relevance

Faithful Representation

Question 20

What are the 4 Enhancing Qualities that make accounting information useful for decision making?

Answer 20

Comparability
Verifiability
Timeliness
Understandibility

Question 21

4 Assumptions of accounting structure

Answer 21

Economic Entity Assumption
Going Concern Assumption
Monetary Unit Assumption

Question 22

Economic Entity Assumption

Answer 22

Company keeps its activity separate and distinct from its owners and any other business unit

Question 23

Going Concern Assumption

Answer 23

A company will have a long life

Question 24

Monetary Unit Assumption

Answer 24

Money is the common denominator of economic activity. Ignores inflation/deflation.

Question 25

Periodicity Assumption

Answer 25

A company can divide its activities into artificial time periods (monthly, quarterly, yearly)

Question 26

4 Principles of accounting

Answer 26

Measurement
Revenue Recognition
Expense Recognition
Full Disclosure

Question 27

Measurement Principle

Answer 27

Measurement of transactions based on either the Historical Cost of Fair Value

Question 28

Revenue Recognition Principle

Answer 28

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

Question 29

Expense Recognition Principle

Answer 29

Requires that expenses are recognized with the revenue they are tied to

Question 30

Full Disclosure Principle

Answer 30

Practice of providing information of sufficient importance to influence judgement/decisions of an informed user

Question 31

What are the 2 types of Measurement Principles? Which is verifiable?

Answer 31

Historical Cost Principle - verifiable

Fair Value Principle

Question 32

What Principle is used to report many assets and liabilities on the balance sheet, and why?

Answer 32

Historical Cost Principle, because it is verifiable

Question 33

What is the market-based principle defined as the price that would be received to sell an asset or transfer a liability?

Answer 33

Fair Value Principle

Question 34

Cost Constraint

Answer 34

Benefits perceived to be derived from informational reporting but exceed the costs associated with it

Question 35

Level of Conceptual Framework devoted to elements of financial statements and qualitative characteristics

Answer 35

2nd

Question 36

Level of Conceptual Framework devoted to the “why” or objective of accounting

Answer 36

1st

Question 37

Level of Conceptual Framework devoted to the “how”, including principles/assumptions/constraints, of accounting

Answer 37

3rd