Accounting-The Conceptual Framework

Front 1

What is the underlying theory of financial accounting known as?

Back 1

The Conceptual Framework

Front 2

What is the purpose of the conceptual framework?

Back 2

It is a body of doctrine that provides the basis for GAAP.

Front 3

How has the conceptual framework evolved?

Back 3

It has developed and evolved over the years as the accounting profession has evolved

Front 4

How has the framework of the conceptual framework changed?

Back 4

It was codified by the Financial Accounting Standards Board beginning in the 1970s

Front 5

What are the series of documents that outlined the concepts that form the basis for everything that will be covered in Accounting 221

Back 5

FASB Statements of Financial Accounting

Front 6

The conceptual framework can be broken down into these sections:

Back 6

Objectives of Financial Reporting
Qualitative Characteristics of
Accounting Information
Elements of Financial Statements
Recognition and Measurement Criteria

Front 7

Recognition and Measurement Criteria can further be broken down into

Back 7

Assumptions
Principles
Constraints

Front 8

What is the primary objective of financial reporting?

Back 8

To provide information that is useful to external decision makers in the assessment of future cash flows-in other words, to provide information useful fo decision-making

Front 9

The qualitative characteristics of information are broken down into two groups:

Back 9

Primary
Secondary

Front 10

What are the 2 primary characteristics?

Back 10

1. Relevance-information that influences decisions

2. Reliability-Information must be free from error and bias

Front 11

What categories fall under relevance?

Back 11

Timely
Predictive Value
Feedback Value

Front 12

What characteristics fall under reliability?

Back 12

Validity
Verifiability
Neutrality

Front 13

Describe timely

Back 13

Relevant information must be available before it loses its relevance

Front 14

Describe predictive value

Back 14

Information must aid users ability to assess and predict the outcome(s) of events

Front 15

Describe feedback value

Back 15

Information must aid users in their assessment of previous outcomes

Front 16

Describe validity

Back 16

Information must measure the economic event that it says it measures

Front 17

Describe verifiability

Back 17

Information must be able to be confirmed as being accurate

Front 18

Describe neutrality

Back 18

Information must be unbiased

Front 19

What are the secondary characteristics?

Back 19

1. Comparability-Information can be compared to information from other businesses.

2. Consistency-Information can be compared across time periods

Front 20

What do the elements of financial statements do?

Back 20

They define what items are included in a full set of financial statements

Front 21

What are the elements in a balance sheet?

Back 21

Assets
Liabilities
Equities

Front 22

Define assets

Back 22

economic resources used by a business in the production of revenue

Front 23

Define liabilities

Back 23

Obligations of a business to provide assets or services sometime in the future

Front 24

Define equities

Back 24

Owner's residual interest in a business

Front 25

What are the 2 types of equities?

Back 25

Contributed capital (Common Stock)

Retained Earnings

Front 26

Define Contributed Capital (Common Stock)

Back 26

Portion of assets contributed to a business by its owners

Front 27

Define retained earnings

Back 27

Portion of assets resulting from the operations of a business that are retained in the business

Front 28

Give an example of retained earnings

Back 28

Distributions (Dividends)

Front 29

Define distributions (dividends)

Back 29

Transfers of wealth from a business to its owners

Front 30

What are the elements on an income statement?

Back 30

Revenues
Expenses
Gaines
Losses

Front 31

Define revenues

Back 31

Increases in assets or decreases in liabilities that result from the operating activities of a business

Front 32

Define expenses

Back 32

Decreases in assets or increases in liabilities that result from the operating activities of a business

Front 33

Define gains

Back 33

Increases in assets or decreases in liabilities that result from peripheral transactions

Front 34

What are peripheral transactions?

Back 34

Transactions used in the business but not in the act of buying and selling

Front 35

Define losses

Back 35

Decreases in assets or increases in liabilities that result from peripheral transactions

Front 36

What do Recognition and Measurement Criteria do?

Back 36

They outline how, what, when, why, and how much of each element is recorded in the accounting system.

Front 37

What criteria provide the basis for accrual accounting?

Back 37

Assumptions
Principles
Constraints

Front 38

What are the 4 parts of assumptions?

Back 38

Separate Entity
Continuity (Going Concern)
Unit-of-Measure
Time Period

Front 39

Define separate entity

Back 39

A specific unit for which accounting records are kept. The unit is distinct and separate from its owners, managers, creditors, and employees (i.e. transactions of the business are separate from transactions of the owners)

Front 40

Define continuity (Going concern)

Back 40

The assumption that companies will continue to operate indefinitely (i.e. they will not go out of business in the near future)

Front 41

Define unit-of-measure

Back 41

Accounting measurements are made in the national monetary unit (dollars in the US)

Front 42

Define time period

Back 42

The long life of a company can be broken into a series of shorter time periods. Accounting transactions can be organized according to these time periods

Front 43

What categories fall under principles

Back 43

Historical cost
Revenue
Matching
Full Disclosure

Front 44

Define historical cost

Back 44

Elements are recorded in the financial statements at their actual, historic, cash equivalent price

Front 45

Define revenue

Back 45

Revenues are recognized in the financial satements when they are earned and measureable.

a. The earnings process is complete
b. An exchange transaction takes place
c. Collection is reasonably assured

Front 46

Define matching

Back 46

Resources consumed to earn revenues in an accounting period should be recorded in that accounting period, regardless of when cash is paid (i.e. expenses are matched with the revenues they help to generate)

Front 47

Define Full disclosure

Back 47

Entities must disclose all relevant economic information (This is where footnotes come into play a lot)

Front 48

What categories fall under constraints?

Back 48

Cost-benefit
Materiality
Conservatism
Industry Preference

Front 49

Define cost-benefit

Back 49

Benefits of recording and reporting information should outweigh the costs of collecting and organizing the information

Front 50

Define materiality

Back 50

Items are considered material if their omission or misstatement will influence the decisions of a reasonable decision maker (user of a financial statement.) Small amounts that will not influence users' decisions may be recorded in the most cost-beneficial manner

Front 51

Define conservatism

Back 51

Accountants should be careful not to overstate assets and revenues or understate liabilities and expenses

Front 52

Define industry preference

Back 52

businesses may use alternative treatments if there is a clear precedent in their industry