Ch. 2 - Conceptual Framework For Financial Accounting

Front 1

The need for Conceptual Framework

Back 1

* To develop a coherent set of standards and rules, Guiding, Principles.

* Solve new and emerging practical problems

developed and used by FASB

Front 2

FASB

Framework is comprised of what three levels

Back 2

* First Level - Basic Objectives

* Second Level - Qualitative Characteristics and Elements

* Third Level - Recognition, Measurement, and Disclosure Concepts

Front 3

First Level

Objective of General- Financial Reporting is?

Back 3

* Provide financial information about the re

porting entity that is useful to:

- Present and potential Capital Providers

(investors and creditors)

Front 4

Second Level

Qualitative Characteristics of Accounting Info

Back 4

Distinguish better (more useful) information to identify FASB Qualitative Characteristics from inferior (less useful) information for decision -making purpoes.

Front 5

Fundamental Qualities

Back 5

* Relevance

- Predictive Value

- Confirmatory Value

- Materilality Value

* Faithful Representation

- Completeness

- Neutrality

- Free From Error

Front 6

Relevance

Back 6

Making a difference in a decision

Front 7

Predictive

Back 7

Future - oriented (help predict future)

Front 8

Confirmatory

Back 8

Confirms / Corrects prior expectations

Front 9

Materiality

Back 9

An item is not recorded because its effect on income would not change a decision.

An item is material if omitting or misstating it could influence decisions that users make.

Front 10

Faithful Representation

Back 10

Numbers or disclosures match what really existed or happened.

Neutrality is a fundamental quality of accounting information known as faithful representation.

Front 11

Completeness

Back 11

All the information necessary is provided.

Front 12

Neutrality

Back 12

Companies cannot select information to favor one set of interested users over another.

Front 13

Free From Error

Back 13

Financial information is accurate.

Front 14

Second Level

Enhancing Qualities

Back 14

* Comparability

* Consistency

* Varafiability

* Timeliness

* Undesirability

Front 15

Comparability

Back 15

Information that is measured and reported in a similar manner for different companies is considered comparable.

Front 16

Consistency

Back 16

When a company applies the same accounting method from period to period.

Front 17

Varafiability

Back 17

Occurs when independent measures, using the same methods, obtain similar results.

Front 18

Timeliness

Back 18

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

Front 19

Understandability

Back 19

The quality of information that lets users see the significance of accounting information.

Front 20

Primary users of Accounting

Back 20

Capital Providers

(Investors and Creditors)

and their characteristics.

Front 21

Constraints

Back 21

Cost

Front 22

Pervasive Criterion

Back 22

Decision - Usefulness

Front 23

Fundamental Qualities

Back 23

Relevance and Faithful Representation

Front 24

Ingredients of fundamental Qualities

Back 24

* Relevance

-Predictive Value

-Confirmatory Value

-Materiality

* Faithful Representation

- Completeness

- Neutrality

- Free From Error

Front 25

Enhancing Qualities

Back 25

Comparability

Verifiability

Timeliness

Understandability

Front 26

Hierarchy of Accounting Qualities

Back 26

Primary users of accounting information

Constraint

Pervasive Criterion

Fundamental Qualities

Ingredients of Fundamental Qualities

Enhancing Qualities

Front 27

Second Level

Elements

Concept statement No. 6 defines ten interrelated elements that relate to measuring performance and financial status of a business enterprise.

Back 27

Assets

Liabilities

Equity

Investment by owners

Distributions to owners

Comprehensive income

Revenues

Expenses

Gains and Loses

Front 28

Assets

Back 28

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

*Cash, Accounts Receivable, Inventory, Property, Plant, and Equipment

Front 29

Liabilities

Back 29

Probable future sacrifices of economic benefits arising from 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.

*Tuition, Rent, memberships, Estimated Warranties, Utilities, cash , services, and Insurance.

Front 30

Equity

Back 30

Residual Interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. A-L=OE

*Selling products, Sell/buying Stock, and Paying Dividends.

Front 31

Investment By Owners

Back 31

Increase Net Assets of a particular enterprise resulting from other entities of something of value to obtain or increase ownership interests (or equity) in it.

*Sells own Stock

Front 32

Distributions to Owners

Back 32

Decrease in Net Assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners.

*Pays Dividend or buys back own stock.

Front 33

Comprehensive Income

Back 33

A change in Equity or Net Assets increase/decrease of an entity during a period from transactions and other events and circumstances from Non-owner sources.

It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Front 34

Revenue

Back 34

Inflows or other enhancements of assets of an entity or settlement of its liabilities (or combo of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. *Sell product record revenue.

Front 35

Expenses

Back 35

Outflows or other uses of assets or incurrences of liabilities (or combo of both) 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. * Cost of providing goods and services.

Front 36

Gains

Back 36

Increase 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 investment by owners.

Front 37

Losses

Back 37

Decrease in net assets in equity 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 38

Third Level

Recognition and Measurement

Back 38

FASB Sets forth most of these concepts in,

Statement of Financial Accounting Concept No. 5

of business enterprises.

Front 39

The Three Concepts of Recognition and Measurement

Back 39

* Assumptions

* Principles

* Underlying Constraints

Front 40

Third Level

Assumptions

Back 40

* Economic Entity

* Going Concern

* Monetary Unit

* Periodicity Assumption

Front 41

Economic Entity

Back 41

A Company keeps its activity (assets and Records) separate from its owners and other businesses.

Front 42

Going Concern

Back 42

A company is assumed to last long enough to fulfill objectives and commitments. (assumes you stay in business for over a year)

Front 43

Monetary Unit

Back 43

Money is the common denominator.

(Money is stable)

Front 44

Periodicity Assumption

Back 44

A Company can divide its economic activities into time periods.

*filling -Q and -K relating to the calendar

Front 45

Third Level

Principles

Back 45

* Measurement Principle

- Historical Cost

- Fair Value

- Revenue Recognition

- Expense Recognition

- Matching Principle

- Full Disclosure Principle

Front 46

Historical Cost

Back 46

Assets and liabilities are recorded at their acquisition price.

Front 47

Fair Value

Back 47

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Reported in Financial Statements or Footnotes.

Front 48

Revenue Recognition

Back 48

Requires companies to recognize revenue in the accounting period in which the performance or obligation is satisfied. (when earned)

Front 49

Expense Recognition

Back 49

* If direct relationship between cost and revenue -> recognize expense in period of revenue

* If no direct relationship between cost and revenue -> expense as incurred

Front 50

Matching Principle

Back 50

Efforts (expenses) should be matched with

accomplishment (revenues) whenever it is reasonable and practicable to do so.

"Let the expense follow the revenues"

Front 51

Full Disclosure Principle

Back 51

Providing information that is of sufficient importance to influence the judgment and decisions of an informed user.

*footnote, financial statement

Front 52

Third Level

Constraints

Back 52

Cost Constraints

Often referred to as Cost - benefit

Front 53

Cost Constraints

Back 53

The cost of providing the information must must be weighed against the benefits that can be derived from using it.

Front 54

First Level is the

Second Level is the

Third Level is the

Back 54

First- the why purpose of accounting

Second- bridge between levels 1 and 3

Third - the how implementation

Front 55

Recognition, Measurement, and Disclosure

Back 55

* Assumptions

* Principles

* Constraints

Front 56

Generally accepted accounting principles

Back 56

Derive their credibility and authority from general recognition and acceptance by the accounting profession.

Front 57

The conceptual framework for financial reporting consists of how many levels?

Back 57

3

*1 Why

*2 Bridge between 1 and 3

*3 How

Front 58

The convergence project by the FASB and IASB will?

Back 58

The IASB framework makes two assumptions – accrual basis and going concern. The converged framework will be a single document, the existing frameworks are very similar, and while the FASB framework discusses accrual accounting, it does not identify it as an assumption.

Front 59

In the conceptual framework for financial reporting, what provides "the how" – the implementation of accounting?

Back 59

Measurement and recognition concepts such as assumptions, principles, and constraints.

Front 60

The underlying theme of the conceptual framework is?

Back 60

Decision Usefulness

Front 61

For information to be relevant it must have both?

Back 61

Predictive Value or Confirmatory Value

Front 62

Enhancing Qualities of accounting information include?

Back 62

Comparability and Varafiability,

Timeliness and Understandability

Front 63

In order to be relevant accounting information must have?

Back 63

Predictive or Confirmatory Value

Front 64

The change in net assets during a period from transactions and other events and circumstances from non-owner sources is called?

Back 64

Comprehensive Income

Front 65

An increase in net assets arising from peripheral or incidental transactions is called?

Back 65

Gain

Front 66

Under current GAAP, inflation is ignored in accounting due to?

Back 66

Monetary Unit Assumption

Front 67

The periodicity assumption suggests that?

Back 67

The economic life of a business can be divided into artificial time periods such as a month, quarter or year.

Front 68

Depreciation and amortization policies are justifiable and appropriate because of the?

Back 68

Going Concern Assumption

Front 69

Generally revenues are recognized when?

Back 69

Performance obligation is satisfied

Front 70

Fair Value Principle is a

Back 70

Market based measure

Front 71

The difficulty in cost-benefit analysis is?

Back 71

That the costs and especially the benefits are not always evident or measurable.

Front 72

The existing conceptual frameworks underlying IFRS and GAAP are?

Back 72

Very similar and there is no need to change many aspects of the existing frameworks.