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Intermediate ACCT 1 (ch. 2)

Conceptual Framework
Underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements
3 levels of Conceptual Framework
1. Basic Objectives
2. Fundamental concepts (qualitative characteristics and elements
3. Recognition and Measurement Concepts (recognition, measurement and disclosure concepts)
What are the Statement of Financial Accounting Concepts intended to establish?
The objectives and concepts for use in developing standards of financial accounting and reporting
Basic Objectives (first level of conceptual framework)
The “why” purpose of accounting. Helps ensure that financial reporting achieves its objective

Objective of financial reporting:
to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions about providing resources to the entity

According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on?
The needs of the users of the information
Qualitative Characteristics of Accounting Information (second level: fundamental concepts)
The FASB identified the qualitative characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) info for decision making purposes
Fundamental Quality – Relevance (second level: fundamental concepts)
To be relevant, accounting info must be capable of making a difference in decision. relevance is 1 of 2 fundamental qualities that make accounting info useful for decision making
3 ingredients of Relevance of fundamental quality
-Predictive Value
-Confirmatory Value
-Materiality
Predictive Value (component of the fundamental quality of Relevance)
Financial info has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future

ex: if potential investors are interested in purchasing common shares of UPS they may analyze its current resources and claims to those resources

Confirmatory Value (component of the fundamental quality of Relevance)
Relevant info also helps users confirm or correct prior expectations

ex: when UPS issues its year end financial statements, it confirms or changes past (or present) expectations based on previous evaluations

Fundamental Quality – Faithful Representation
Means that the number and descriptions match what really existed or happened
3 ingredients of Faithful Representation of fundamental quality
-Completness
-Neutrality
-Free from Error
Completeness (component of Faithful Representation of fundamental quality)
Means that all the info that is necessary for faithful representation is provided
Neutrality (component of Faithful Representation of fundamental quality)
Means that a company cannot select info to favor one set of interested parties over another
Free from Error (component of Faithful Representation of fundamental quality)
An information item that is free from error will be more accurate (faithful) representation of a financial item
Enhancing Qualities of Fundamental Concepts (second level)
-Comparability
-Verifiability
-Timeliness
-Understandability
Comparability (enhancing quality of fundamental concepts)
Information that is measured and reported in a similar manner for different companies
Verifiability (enhancing quality of fundamental concepts)
Occurs when independent measures, using the same methods, obtain similar results
Timeliness (enhancing quality of fundamental concepts)
means having info available to decision makers before it loses it capacity to influence decisions
Understandability (enhancing quality of fundamental concepts)
Is the quality of info that lets reasonably informed users see its significance
According to the FASB conceptual framework, and entity’s revenue may result from
A decrease in a liability from primary operations
The 3rd level is made up of
-Assumptions
-Principles
-Constraints
Third level: Assumptions
The FASB set forth most of these concepts. Theses basic assumptions are:
Economic Entity
-company keeps its activity separate from owners and other businesses

Going Concern
-company to last long enough to fulfill objectives and commitments

Monetary Unit
-money is the common denominator

Periodicity
-company can divide it economic activities into time periods

Third Level: Principles
Measurement
-the most commonly used measurements are based on historical cost and fair value

Revenue Recognition
-requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

Expense Recognition
-“let the expense follow the revenues”

Full Discloser
-Providing info that is of sufficient importance to influence the judgment and decisions of an informer user. Provided through financial statements, notes to the financial statements and supplementary information

Third Level: Constraints
Cost Constraints
-cost of providing info must be weighed against the benefits that can be deriver from using it
What is true about the IASB and FASB conceptual frameworks?
-The IASB conceptual framework does not identify the element comprehensive income

-The existing IASB and FASB conceptual frameworks are organized in similar ways

-The FASB and IASB agree that the objective of financial reporting is to provide useful info to investors and creditors

The issues that the FASB and IADB must address in developing a common conceptual framework include?
-Should the characteristics of relevance be traded off in favor of info that is verifiable?

-Should a single measurement method be used?

-Should the common framework lead to standards that are principles base or rules based?

Accounting rule-making that relies on a body of concepts will result in _______ and ______ pronouncements
Useful, Consistent
General purpose financial repots 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 in financial reports
Standard setting that is based on personal conceptual framework will lead to?
Different conclusions about identical or similar issues. As a result, standards will not be consistent with now another, and past decisions may not be indicative of future ones
Information that is decision-useful is useful to?
info that is decision-useful to capital providers may also be useful to users of financial reporting who are not capital providers
The objective of financial reporting is the foundation from which
the other aspects of the framework logically result
Qualitative characteristics being employed when companies in the same industry are using the same accounting principles. Is an example of what qualitative characteristic?
Comparability
Quality of info that confirms users’ earlier expectations. Is an example of what qualitative characteristic?
Confirmatory Value
Imperative for providing comparisons of a company from period to period. Is an example of what qualitative characteristic?
Comparability (consistency)
Ignores the economic consequences of a standard or rule. Is an example of what qualitative characteristic?
Neutrality
Requires a high degree of consensus among individuals on a given measurement. Is an example of what qualitative characteristic?
Verifiability
Predictive values us an ingredient of this fundament quality of information. Is an example of what qualitative characteristic?
Relevance
4 qualitative characteristics that are related to both relevance and faithful representation. Is an example of what qualitative characteristic?
Comparability, Verifiability, Timeliness, and Understandability
An item is not recorded because its effect on income would not change a decision. Is an example of what qualitative characteristic?
Materiality
Neutrality is an ingredient of this fundamental quality of accounting information. Is an example of what qualitative characteristic?
Relevance and Faithful Representation
Two fundamental qualities that make accounting info useful for decision making purposes. Is an example of what qualitative characteristic?
Relevance and Faithful Representation
Issuance of interim reports is an example of what enhancing quality of relevance?
Timeliness
Allocates expenses to revenues in the proper period. Is an example of which accounting assumption, principle, or constraint?
Expense Recognition Principle
Indicates that fair value changes subsequent to purchase are not recorded in the accounts (not rev. recognition). Is an example of which accounting assumption, principle, or constraint?
Measurements (historical cost principle)
Ensures that all relevant financial information is reported. Is an example of which accounting assumption, principle, or constraint?
Full discloser Principle
Rationale why plant assets are not reported at liquidation value (not historical cost principle). Is an example of which accounting assumption, principle, or constraint?
Going Concern Assumption
Indicates that personal and business record keeping should be separately maintained. Is an example of which accounting assumption, principle, or constraint?
Economic Entity Assumption
Separates financial information into time periods for reporting purposes. Is an example of which accounting assumption, principle, or constraint?
Periodicity Assumption
Assumes that the dollar is the “measuring stick” used to report on financial performance. Is an example of which accounting assumption, principle, or constraint?
Monetary Unit Assumption

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