Intermediate ACCT 1 (ch. 2) – Flashcards
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Conceptual Framework
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Underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements
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3 levels of Conceptual Framework
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1. Basic Objectives 2. Fundamental concepts (qualitative characteristics and elements 3. Recognition and Measurement Concepts (recognition, measurement and disclosure concepts)
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What are the Statement of Financial Accounting Concepts intended to establish?
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The objectives and concepts for use in developing standards of financial accounting and reporting
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Basic Objectives (first level of conceptual framework)
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The "why" purpose of accounting. Helps ensure that financial reporting achieves its objective Objective of financial reporting: to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions about providing resources to the entity
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According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on?
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The needs of the users of the information
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Qualitative Characteristics of Accounting Information (second level: fundamental concepts)
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The FASB identified the qualitative characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) info for decision making purposes
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Fundamental Quality - Relevance (second level: fundamental concepts)
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To be relevant, accounting info must be capable of making a difference in decision. relevance is 1 of 2 fundamental qualities that make accounting info useful for decision making
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3 ingredients of Relevance of fundamental quality
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-Predictive Value -Confirmatory Value -Materiality
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Predictive Value (component of the fundamental quality of Relevance)
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Financial info has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future ex: if potential investors are interested in purchasing common shares of UPS they may analyze its current resources and claims to those resources
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Confirmatory Value (component of the fundamental quality of Relevance)
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Relevant info also helps users confirm or correct prior expectations ex: when UPS issues its year end financial statements, it confirms or changes past (or present) expectations based on previous evaluations
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Fundamental Quality - Faithful Representation
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Means that the number and descriptions match what really existed or happened
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3 ingredients of Faithful Representation of fundamental quality
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-Completness -Neutrality -Free from Error
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Completeness (component of Faithful Representation of fundamental quality)
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Means that all the info that is necessary for faithful representation is provided
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Neutrality (component of Faithful Representation of fundamental quality)
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Means that a company cannot select info to favor one set of interested parties over another
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Free from Error (component of Faithful Representation of fundamental quality)
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An information item that is free from error will be more accurate (faithful) representation of a financial item
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Enhancing Qualities of Fundamental Concepts (second level)
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-Comparability -Verifiability -Timeliness -Understandability
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Comparability (enhancing quality of fundamental concepts)
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Information that is measured and reported in a similar manner for different companies
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Verifiability (enhancing quality of fundamental concepts)
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Occurs when independent measures, using the same methods, obtain similar results
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Timeliness (enhancing quality of fundamental concepts)
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means having info available to decision makers before it loses it capacity to influence decisions
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Understandability (enhancing quality of fundamental concepts)
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Is the quality of info that lets reasonably informed users see its significance
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According to the FASB conceptual framework, and entity's revenue may result from
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A decrease in a liability from primary operations
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The 3rd level is made up of
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-Assumptions -Principles -Constraints
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Third level: Assumptions
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The FASB set forth most of these concepts. Theses basic assumptions are: Economic Entity -company keeps its activity separate from owners and other businesses Going Concern -company to last long enough to fulfill objectives and commitments Monetary Unit -money is the common denominator Periodicity -company can divide it economic activities into time periods
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Third Level: Principles
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Measurement -the most commonly used measurements are based on historical cost and fair value Revenue Recognition -requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied Expense Recognition -"let the expense follow the revenues" Full Discloser -Providing info that is of sufficient importance to influence the judgment and decisions of an informer user. Provided through financial statements, notes to the financial statements and supplementary information
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Third Level: Constraints
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Cost Constraints -cost of providing info must be weighed against the benefits that can be deriver from using it
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What is true about the IASB and FASB conceptual frameworks?
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-The IASB conceptual framework does not identify the element comprehensive income -The existing IASB and FASB conceptual frameworks are organized in similar ways -The FASB and IASB agree that the objective of financial reporting is to provide useful info to investors and creditors
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The issues that the FASB and IADB must address in developing a common conceptual framework include?
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-Should the characteristics of relevance be traded off in favor of info that is verifiable? -Should a single measurement method be used? -Should the common framework lead to standards that are principles base or rules based?
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Accounting rule-making that relies on a body of concepts will result in _______ and ______ pronouncements
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Useful, Consistent
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General purpose financial repots help users who?
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Lack the ability to demand all the financial info they need from an entity and therefore must rely, at least partly, on the info in financial reports
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Standard setting that is based on personal conceptual framework will lead to?
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Different conclusions about identical or similar issues. As a result, standards will not be consistent with now another, and past decisions may not be indicative of future ones
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Information that is decision-useful is useful to?
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info that is decision-useful to capital providers may also be useful to users of financial reporting who are not capital providers
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The objective of financial reporting is the foundation from which
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the other aspects of the framework logically result
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Qualitative characteristics being employed when companies in the same industry are using the same accounting principles. Is an example of what qualitative characteristic?
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Comparability
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Quality of info that confirms users' earlier expectations. Is an example of what qualitative characteristic?
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Confirmatory Value
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Imperative for providing comparisons of a company from period to period. Is an example of what qualitative characteristic?
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Comparability (consistency)
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Ignores the economic consequences of a standard or rule. Is an example of what qualitative characteristic?
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Neutrality
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Requires a high degree of consensus among individuals on a given measurement. Is an example of what qualitative characteristic?
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Verifiability
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Predictive values us an ingredient of this fundament quality of information. Is an example of what qualitative characteristic?
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Relevance
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4 qualitative characteristics that are related to both relevance and faithful representation. Is an example of what qualitative characteristic?
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Comparability, Verifiability, Timeliness, and Understandability
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An item is not recorded because its effect on income would not change a decision. Is an example of what qualitative characteristic?
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Materiality
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Neutrality is an ingredient of this fundamental quality of accounting information. Is an example of what qualitative characteristic?
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Relevance and Faithful Representation
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Two fundamental qualities that make accounting info useful for decision making purposes. Is an example of what qualitative characteristic?
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Relevance and Faithful Representation
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Issuance of interim reports is an example of what enhancing quality of relevance?
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Timeliness
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Allocates expenses to revenues in the proper period. Is an example of which accounting assumption, principle, or constraint?
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Expense Recognition Principle
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Indicates that fair value changes subsequent to purchase are not recorded in the accounts (not rev. recognition). Is an example of which accounting assumption, principle, or constraint?
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Measurements (historical cost principle)
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Ensures that all relevant financial information is reported. Is an example of which accounting assumption, principle, or constraint?
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Full discloser Principle
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Rationale why plant assets are not reported at liquidation value (not historical cost principle). Is an example of which accounting assumption, principle, or constraint?
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Going Concern Assumption
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Indicates that personal and business record keeping should be separately maintained. Is an example of which accounting assumption, principle, or constraint?
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Economic Entity Assumption
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Separates financial information into time periods for reporting purposes. Is an example of which accounting assumption, principle, or constraint?
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Periodicity Assumption
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Assumes that the dollar is the "measuring stick" used to report on financial performance. Is an example of which accounting assumption, principle, or constraint?
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Monetary Unit Assumption
