The Cost Principle States That Assets Must Be Recorded at the Cost at Which They Were Acquired. Although Plant Assets Can Fluctuate in Fair Market Value, Their Book Value Will Remain Consistent. Companies Must Compute

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ANSWERS TO QUESTIONS

1. A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. A conceptual framework is necessary in financial accounting for the following reasons: 1. It will enable the FASB to issue more useful and consistent standards in the future. 2. New issues will be more quickly soluble by reference to an existing framework of basic theory. 3. It will increase financial statement users’ understanding of and confidence in financial reporting. 4. It will enhance comparability among companies’ financial statements.

2. The primary
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5. In providing information to users of financial statements, the Board relies on general-purpose financial statements. The intent of such statements is to provide the most useful information possible at minimal cost to various user groups. Underlying these objectives is the notion that users need reasonable knowledge of business and financial accounting matters to understand the information contained in financial statements. This point is important: it means that in the preparation of financial statements a level of reasonable competence can be assumed; this has an impact on the way and the extent to which information is reported.

6. Comparability facilitates comparisons between information about two different enterprises at a particular point in time. Consistency facilitates comparisons between information about the same enterprise at two different points in time.

7. At present, the accounting literature contains many terms that have peculiar and specific meanings. Some of these terms have been in use for a long period of time, and their meanings have changed over time. Since the elements of financial statements are the building blocks with which the statements are constructed, it is necessary to develop a basic definitional framework for them.

8. Distributions to owners differ from expenses and losses in that they represent transfers to owners, and they do not arise from activities intended to produce income.

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