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67 Cards in this Set
- Front
- Back
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What is conceptual framework? |
- establishes the concepts that underlie financial reporting - coherent system of concepts that flow from an objective |
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What is general purpose financial reporting? |
help users who lack the ability to demand all the financial info they need from an entity and therefore must rely, at least partly, on the info provided in financial reports |
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What is qualitative characteristics? |
accounting information that distinguish better info from inferior information for decision-making processes |
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What is relevant accounting information? |
must be capable of making a difference in a decision |
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What is predictive value? |
financial information that has value as an input to predictive processes used by investors to form their own expectations about the future |
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What is confirmatory value? |
relevant information also helps users confirm or correct prior expectations |
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What is materiality? |
- company- specific aspect of relevance - it is this when omitting it or misstating it could influence decisions - it must make a difference or a company need not disclose it |
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What is faithful representation? |
- numbers and descriptions match what really existed or happened - necessity because most users have neither the time nor the expertise to evaluate the factual content of the information |
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What is completeness? |
all information that is necessary for faithful representation is provided |
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What is neutrality? |
company cannot select info to favor one set of interested parties over another |
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What is comparability? |
- information that is measured and reported in a similar manner for different companies - enables users to identify the real similarities and differences in economic events between companies |
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What is consistency? |
- another type of comparability - present when a company applies to the same accounting treatment to similar events from period to period |
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What is verifiability? |
occurs when independent measurers, using the same methods, obtain similar results |
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What is timeliness? |
having information available to decision makers before it looks its capacity to influence decisions |
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What is understandability? |
quality of information that lets reasonably informed users see its signifigance |
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What is basic elements? |
definition included in the development of a theoretical structure |
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What are the 2 distinct groups of the financial statement elements? |
- moments in time - period of time |
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What is articulation? |
key figures in one financial statement correspond to balance in another |
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What are assets? |
probably future economic benefits obtained or controlled by a particular entity as a result of past transactions or events |
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What are liabilities? |
probable future sacrifices of economic benefits arising fro 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 event |
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What is investment by owners? |
- 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 in it - assets are the most commonly received - may include services or satisfaction or conversion of liabilities of the enterprise |
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What are distributions to owners? |
- decrease in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners - decrease equity in enterprises |
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What is comprehensive income? |
- change in equity of an entity during a period from transactions and other events and circumstances from non-owner sources - includes all change in equity during a period except those resulting from investments by owners and distributions to owners |
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What is revenue? |
inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivery or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations |
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What are expenses? |
- outflows or other using up of assets or incurrences of liabilities during a period from delivering and producing goods, rendering services or carrying out other activities that constitute the entity's ongoing major or central operations |
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What are gains? |
increase in equity from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affect the entity during a period except those that result from revenues or investments by owners |
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What are losses |
decreases in equity from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affect the entity during a period except those that result from expenses or distributions by owner |
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What four basic structures underlie the the financial accounting structure? |
- economic entity - going concern - monetary unit - periodicity |
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What is the economic entity assumption? |
- economic activity can be identified with a particular unit of accountability - company keeps its activity separate and distinct from its owners and any other business unit |
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What is going concern assumption? |
- assume that the company will have a long life - applies in most business situations = except where liquidation appears imminent is the assumption inapplicable |
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What is the monetary unit assumption? |
- money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis - relevant, simple, universally available, understandable, and useful |
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What is the periodicity assumption? |
- implies that a company can divide its economic activity into artificial time periods |
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What are the 4 basic principles of accounting? |
- measurement - revenue recognition - expense recognition - full disclosure |
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What is the historical cost principle? |
- companies account for and report many assets and liabilities on the basis of acquisition price - verifiable |
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What is fair value? |
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participation at the measurement date |
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What is an advantage of fair value over historical cost? |
- more relevant - provides better insight in the value of a company's assets and liabilities - better basis for assessing future cash flow prospects |
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What is revenue recognition principle? |
revenue recognized occurs when realized or realizable and when earned |
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When is revenue realized? |
- when it exchanges products, merchandise, or others assets for cash or claims to cash - when assets received or held are readily convertible into cash or claims to cash |
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When are revenues considered earned? |
When the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues |
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When are revenues recognized at the end of production? |
- revenues recognized after completion of the production cycle but before the sales tax - occurs if products or other assets are salable in an active market at readily determinable prices without significant additional cost EX: mining of minerals, agriculture |
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What is installment sales method? |
- company require payment in periodic installments over a long period of time EX: retail |
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What are product costs? |
- material, labor, and overhead attached to the product - carried into the future periods if they recognize the revenue from the product in subsequent perioids |
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What are period costs? |
- officer's salaries and other administrative expenses, attached to the period - a direct relationship can't be determined between these and revenue |
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What is full disclosure principle? |
companies follow general practice of providing info that is of sufficient importance to influence the judgement and decisions of an informed users |
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- sufficient detail to disclose matters that make a difference to users - sufficient condensation to make the information understandable, keeping in mind costs of preparing it and using it |
What kind of info is published under the full disclosure principle? |
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- items should meet the basic definition of a basic element - measurable with sufficient certainty - be relevant and reliable |
What defines items to be in financial statements? |
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What are notes to financial statements? |
generally amplify or explain the items presented in the main body of the statements |
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What is supplementary information? |
may include details or amounts that present a different perspective from that adopted in the financial statements
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What is the cost constraint principle? |
weigh the costs of providing the info against the benefits that can be derived from using it |
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What are industry practices? |
peculiar nature of some industries and business concerns |
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What is the conceptual framework of financial reporting? |
system of interactive objectives and fundamentals which can lead to a set of consistent standards in preparing financial reports |
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What are the levels of the framework of financial accounting? |
1. objective 2. qualitative characteristics of accounting elements 3. information and measurement concepts |
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- objective of general purpose financial reporting - provide useful financial information of the reporting entity to external users in decisions regarding providing resources to the entity = decisions include buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit |
Describe level 1 of the conceptual framework |
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- qualitative - fundamental qualities = relevance and faithful representation |
Describe level 2 of the conceptual framework |
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What is materiality? |
judgement should be made in the context of the nature and the amount of the item |
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- measurement and recognition concepts - assumptions - principles - constraints |
Describe level 3 of the conceptual framework. |
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What is fair value hierarchy level 1? |
- most reliable - measures are based on quoted prices for identical instruments in active markets
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What is fair value hierarchy level 2? |
measures are based on quoted prices for similar instruments in active markets |
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What is fair value hierarchy level 3? |
- least reliable - measures are based on unobservable inputs such as company's data assumptions |
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What is revenue recognition principle? |
- revenue is recognized when it is earned and realized or realizable = these conditions are met at time of sale - persuasive evidence of a sale - price is fixed or determinable - collectibility is reasonably assured - delivery has occurred or services have been rendered |
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What is earned? |
entity has substantially accomplished what it must do to be entitled to compensation |
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What is realized? |
goods are exchanged for cash or claims to cash |
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What is realizable? |
- assets received as compensation are readily convertible into cash or claims to cash |
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What is expense recognition principle? |
- if revenue recognized in a period, all related expenses should be recognized in the same period = includes; traceable costs, period costs, allocated costs |
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What are traceable costs? |
contribution of these costs can be traced to specific revenue and therefore, are expensed when revenues are recognized |
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What are period costs? |
contributions of these costs cannot be traced easily to specific revenues, and therefore, are expensed when they are consumed or occured |
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What are allocated costs? |
- expenses such as depreciation expense, bad debt expenses, etc. which contributes to revenues cannot be traced - these expenses are estimated and recognized at the end of the period. |
