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Accounting Chp 2

What is a conceptual framework for financial reporting?
A coherent system of concepts and ideas that flow from an objective.
The conceptual framework
Act as a guide to help FASB develop and maintain standards used as the basis for GAAP.
Why the need of a Conceptual Framework?
To develop a coherent set of standards and rules.
GAAP will be more consistent and useful.
To solve new and emerging practical problems(Emerging Issues)
Generally accepted accounting principles
Derive their credibility and authority from general recognition and acceptance by the accounting profession.
Which of the following are not true concerning a conceptual framework in accounting?
It should be based on fundamental truths that are derived from the laws of nature.
All of the following statements about the conceptual framework are correct except it:
Pescribes the nature, function, and limits of financial accounting and financial statements.
Icreases financial statement users’ understanding of and confidence in financial reporting.
I a coherent system of interrelated objectives and fundamentals that can lead to consistent standards.
In the conceptual framework for financial reporting, what provides “the why”–the goals and purposes of accounting?
Objective of financial reporting (First level of Conceptual Framework)
Which level of the conceptual framework is devoted to recognition and measurement concepts?
3rd, sets forth fundamental recognition and measurement criteria and guidance on what informaiton should be formally incorporated into financial statements and when. (The How)
Concepts include: assumptions, principles, and constraints.
The first level of the conceptual framework is the:
objective of financial reporting., Presents the goals and purposes of accounting. (The Why)
All of the following statements are false regarding the IASB and FASB convergence efforts except:
*****The FASB framework does not identify accrual accounting as an assumption.*****
Te FASB framework extensively discusses and assumes that reporting entities are going concerns.
Te IASB and FASB have not been able to agree on qualitative characteristics, so that part of the project was scrapped.
Tere is a need to change many aspects of existing frameworks.
Who develop the Conceptual Framework?
In 1976, the FASB began to develop a conceptual framework that would be a basis for setting accounting rules and for resolving financial reporting controversies.
FASB has since issued 7 Statements of Financial Accounting Concepts that relate to Financial reporting for business enterprises.
1.Objectives of Financial Reporting
2.Qualitative Characteristics of Accounting Info.
3.Elements of Financial Statements.
5.Recognition and Measurement in Financial Statements.
6.Elements of Financial Statements
The objective of the joint project of the IASB and the FASB is to develop a conceptual framework to replace the going concern concept.
The Three levels of Conceptual Framework
1. Basic Objectives (The Why)(Purpose of Acct.)
2. Qualitatives Characteristics (Makes accounting useful) and Elements of financial statements (Assets, liabilities, revenues, exp.)
3. Recognitions, Measurements, and Disclousure Concepts. (The How)
The Second level of the conceptual framework is the:
The second level forms a bridge between the Why and the How. It divides into two main categories: Qualitative Characteristics and Basis Elements.
The third level of the Conceptual Framework for Financial Reporting is
Recognition, Measurement , and Disclousure Concepts
What are the Statements of Financial Accounting Concepts intended to establish?
The objectives and concepts for use in developing standards of Financial Accounting and Reporting
According to FASB Conceptual Framework, the objectives of Financial Reporting for business enterprises are based on?
The needs of the users of the informaiton.
Qualitative Characteristics:Second Level Second Level of Conceptual Framework, Fundamental Quality-Relevance
To be Relevant, accounting information must be capable of making a difference in a decision. Relevance is one of the two fundamental qualities that make accounting information useful for decision – making.
Qualitative Characteristics:Second Level Fundamental Quality-Relevance(Predictive Value)
Financial Information has predictive value if it has values as an input to predictive processes used by investors to form their own expectations about the future.
Financial Information
is capable of making a difference when it has predictive value, confirmatory value or both.
Qualitative Characteristics:Second Level Fundamental Quality-Relevance(Confirmatory Value)
Relevant information also helps users confirm or correct prior expectations.
Qualitative Characteristics:Second Level Fundamental Quality-Relevance (Materiality)
Information is material if ommitting it or misstating it could influence decisions that users make on the basis of the reported financial information.
Companies must consider both quantitative and qualitative factors in determining whether an item is MATERIAL
The underlying theme of the conceptual framework is
Decision usefulness.
Enhancing qualities include all of the following except
In order to be relevant, financial information must have all of the following ingredients of fundamental qualities except
have predictive value.
have confirmatory value.
****be free from error.*****
be material.
Accounting information is considered to be relevant when it
is capable of making a difference in a decision.
Which of the following is an ingredient of the fundamental quality of faithful representation?
freedom from error.
Qualitative Characteristics:Second Level Fundamental Quality-Faithful Representation
Completeness, Naturality, Free from Error.
Faithful Representation means that the numbers and descriptions match what really existed or happened.
Fundamental Quality- Faithful Representation (Completeness)
Means that all the information that is necessary for faithful representation is provided.
Fundamental Quality-Faithful Representation (Neutrality)
Means that a company cannot select information to favor one set of interested parties over another.
Fundamental Quality-Faithful Representation (Free from Error)
An information that is free from error will be a more accurate faithful representation of a financial item.
All of the following are ingredients of relevance except:
feedback value.(Confirmatory)
predictive value.
Enhancing qualities of accounting information include:
comparability and verifiability, Timeliness, understandability
Companies and their auditors have adopted a general rule of thumb that anything under 5% of _______ is considered not material
net income
The pervasive criterion of accounting information is decision usefulness.
To be Faithful Representation:
Information must be complete, neutral and free from Error.
Information that has been measured and reported in a similar manner for different enterprises is considered comparable`
For information to be relevant, it needs to have predictive or feedback value.
The FASB sometimes issues standards that have undesirable economic effects on an industry or company.
The fundamental qualities of accounting information are:
Relevance and faithful representation.
Counting Inventory is referred to:
Direct Verification
Basic Elements (2nd level)
Assets, Liabilities, Equity, Investments by owner, distributions to owners, comprehnsive income, revenues, expenses, gains, and losses.
Basic Elements Moment in time
Assets, Liabilities, and Equity
Basic Elements Period in Time
Investments by owners, distribution to owners, comprehensive income, revenues, expenses, gains and losses
According to the FASB conceptual framework, and entity’s revenue may result from
A decrease in a liability from primary operations.
Third Level Recognition and Measurement Concepts
This concepts explain how companies should recognize, measure, and report financial elements and events.
According to SFAC (Statement of Financial Accounting Concepts)
To recognize and item, transaction or event, must meet the definition of an “element of financial statements” and must be measurable.
Third level Recognition and Measurement Concepts
Basic Assumptions, Basic Principles of Accounting, and Constraints.
Third Level Recognition and Measurement Concepts (Basic Assumptions)
Economic Entity, Going Concern, Monetary Unit, and Periodicity
Third Level Recognition and Measurement Concepts (Basic Principles)
There are four basic principles: Measurement, revenue recognition, expense recognition, and full disclousure.
Third Level Recognition and Measurement Concepts (Constraints)
A decrease in net assets arising from peripheral or incidental transactions is called a(n)
Which of the following statements about comprehensive income is incorrect?
Changes in equity of an entity during a period from transactions and other events from nonowner sources are included in comprehensive income.
****It includes all changes in equity during a period except net income.****
It is more inclusive than the traditional notion of net income.
Unrealized holding gains on available-for-sale securities are included in comprehensive income.
Increases in equity from peripheral or incidental transactions of an entity are:
Which of the following elements of financial statements is the result of transactions, events, or circumstances that affect an enterprise during a period of time?
Comprehensive Income
Under current GAAP, inflation is ignored in accounting due to the
monetary unit assumption.
Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the
economic entity assumption.
Depreciation and amortization policies are justifiable and appropriate because of the:
going concern assumption.
The assumption that implies that the economic activities of an enterprise can be divided into artificial time periods is the:
periodicity assumption.
The periodicity assumption specifies that the appropriate time period for financial reporting is the calendar year.
False, becasuse it can be monthly, quarterly, or yearly
Which assumption makes the current – noncurrent classification of assets and liabilities on the balance sheet useful?
Going concern assumption.
Revenue is generally recognized when realized or realizable and earned. This statement describes the
revenue recognition principle.
“When products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash” is a definition of
realized revenue.
Expensing the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of applying the
materiality quality.
Generally, revenue should be recognized:
at the time of sale
Generally, expenses are recognized when the:
work or product actually makes its contribution to revenue.
Providing information that is of sufficient importance to influence the judgment and decisions of an informed user is required by the
full disclosure principle.
Which of the following statements about the fair value principle is not true?
Fair value is generally more relevant than historical cost.
Measurement based on fair value can increase subjectivity into financial reporting.
*****GAAP requires the use of fair value for financial assets and financial liabilites.*****
Fair value is a market-based measure.
The historical cost principle applies even when a firm is not a going concern.
False, because if it is not a going concern liquidation will be appropiate
There are no exceptions to the revenue recognition rule that revenue is only recognized at the time of sale.
False, revenue may be recognize during production, at the end or when cash is received
The full disclosure principle requires that all information that is of sufficient importance to influence the judgment and decisions of informed users be disclosed in the main body of the financial statements and in the notes to the financial statements.
False, Disclosure may also be accomplished through supplementary information.
Costs are classified as period costs when a company cannot establish a direct relationship between the cost and revenues.
True, Period costs, such as administrative salaries, are expensed in the period when incurred because there is no direct relationship between the cost and revenues.
Which of the following is a constraint recognized by the Conceptual Framework?
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