Acct 327 Ch 2

Front 1

Qualitative Characteristics of Accounting

Back 1

determine which alternative provides the most useful information for decision making purposes.

Front 2

Fundamental Qualities of Accounting

Back 2

Relevance

Faithful Representation

Front 3

Fundamental Qualities - Relevance

Back 3

must be capable of making a difference in a decision.

Predictive Value

Confirmatory Value

Materiality.

Front 4

Predictive Value

Back 4

has value as an input to predictive processes used by investors to form their own expectations about the future.

Front 5

Confirmatory Value

Back 5

confirm or correct prior expectations.

Front 6

Materiality

Back 6

company specific aspect of relevance. material if omitting information or misstating it could influence decisions that users make on the basis of the reported financial information.

Must make a difference.

must evaluate relative size and importance. must consider both quantitative and qualitative factors.

Front 7

Fundamental Quality - Faithful Representation

Back 7

the numbers and descriptions match what really existed or happened.

Complete

Neutral

Free From Error

Front 8

Completeness

Back 8

all the information that is necessary for faithful representation is provided.

Front 9

Neutrality

Back 9

a company cannot select information to favor one set of interested parties over another. unbiased information must be the overriding consideration.

Front 10

Free From Error

Back 10

more accurate and faithful representation of a financial item. most financial reporting measures involve estimates of various types that incorporate management's judgement.

Front 11

Enhancing Qualities

Back 11

Comparability

Verifiability

Timeliness

Understandability

Front 12

Comparability

Back 12

enables users to identify the real similarities and differences in economic events between companies.

Consistency: when a company applies the same accounting treatment to similar events, from period to period

Front 13

Verifiability

Back 13

occurs when independent measurers, using the same methods, obtain similar results

Direct verification: counting inventory

Indirect Verification: check inputs and recalculate the outputs using the same acct conventions

Front 14

Timeliness

Back 14

having information available to decision makers before it loses its capacity to influence decisions.

Front 15

Understandability

Back 15

quality of information that lets reasonably informed users see its significance. enhanced when information is classified, characterized and presented clearly and concisely.

Front 16

Asset

Back 16

probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

Front 17

Liabilities

Back 17

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Front 18

Equity

Back 18

Residual interest in the assets of an entity that remains after deducting its laibilities. in a business enterprise, the equity is the ownership interest.

Front 19

Investment by Owners

Back 19

Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it. Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise

Front 20

Distributions to Owners

Back 20

Decreases in Net Assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. Distributions to owners decrease ownership interests (or equity) in an enterprise.

Front 21

Comprehensive Income

Back 21

Change in equity (net assets) of an entity during 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

Front 22

Revenues

Back 22

Inflows or other enhancements of assets of an entity or settlement of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations

Front 23

Expenses

Back 23

Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations

Front 24

Gains

Back 24

increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

Front 25

Losses

Back 25

Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

Front 26

Basic Assumptions

Back 26

Economic Entity

Going Concern

Monetary Unit

Periodicity

Front 27

Economic Entity Assumption

Back 27

economic activity can be identified with a particular unit of accountability.

entity concept does not necessarily refer to a legal entity.

Front 28

Going Concern Assumption

Back 28

company will have a long life.

only where liquidation appears imminent is the assumption inapplicable.

Front 29

Monetary Unit Assumption

Back 29

money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

monetary unit is relevant simple and universally available, understandable and useful.

Front 30

Periodicity Assumption

Back 30

implies that a company can divide its economic activities into artificial time periods. time periods vary but the most common are monthly, quarterly, yearly.

shorter the time period the more difficult it is to determine the proper net income.

Front 31

Basic Principles of Accounting

Back 31

Measurement

Revenue Recognition

Expense Recognition

Full Disclosure

Front 32

Measurement Principle

Back 32

Historical Cost: account for and report many assets and liabilities on the basis of acquisition price. generally thought to be verifiable.

Fair Value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction at the measurement date.

Front 33

Revenue Recognition Principle

Back 33

revenue recognition generally occurs when realized or realizable and when earned.

Front 34

Expense Recognition Principle

Back 34

let the expense follow the revenues.

when the work or the product actually contributes to revenue.

matching efforts with accomplishment, the expense recognition principle is implemented.

Front 35

Full Disclosure Principle

Back 35

that the nature and amount of information included in financial reports reflects a series of judgmental tradeoffs that strive for sufficient detail to disclose matters that make a difference to users yet sufficient condensation to make the information understandable.

Front 36

Constraints

Back 36

cost

industry practices

Front 37

Cost Constraint

Back 37

weigh the costs of providing the information against the benefits that can be derived from using it.

Front 38

Industry Practices

Back 38

peculiar nature of some industries and business concerns sometimes require departure from basic theory.