Chapter 2 - Conceptual Framework for Financial Accounting
What is the Measure Principle?
Different measurement bases are allowed. Most common: historical cost and FMV
What is the Periodicity Assumption?
Divide activities into periods
4 Assumptions
Economic Entity Going Concern Monetary Unit Periodicity
4 Principles
Measurement Principle Revenue Recognition Expense Recognition Full Disclosure
Describe level 3 of the conceptual framework
Recognition, Measurement and Disclosure Concepts: 4 Assumptions 4 Principles 2 Constraints
What is the Revenue Recognition Principle?
Recognize revenue when it is 1. realized or realizable and 2. earned
What is relevance?
Relevant information is capable of making a difference in a decision.
What is Timeliness?
Reporting information when it can still influence decisions.
What is the Industry Practice Constraint?
Some industries depart from standards due to their nature
Level 2: Qualitative Characteristics 10 Basic Elements
1. Assets 2. Liabilities 3. Equity 4. Investment by owners 5. Distributions to owners 6. Comprehensive income 7. Revenue 8. Expenses 9. Gains 10. Losses
3 Levels of the Conceptual Framework
1. Basic Objectives 2. Qualitative Characteristics and Elements 3. Recognition, Measurement, and Disclosure Concepts
Level 2: Qualitative Characteristics 4 Enhancing Qualities
1. Comparability 2. Verifiability 3. Timeliness 4. Understandability
3 ingredients of faithful represenation
1. Completeness 2. Neutrality 3. Free from error
2 Constraints
1. Cost Constraint 2. Industry Practice
Describe level 2 of the conceptual framework
2 Fundamental Qualities, each having 3 ingredients 4 Enhancing Qualities 10 Basic Elements
Basic Objective of Financial Reporting
To provide financial information to present and potential 1. investors 2. lenders 3. creditors for decision-making about providing resources to the firm
What is the Cost Constraint?
Weigh the cost of providing info against the benefit of doing so
What are the exceptions to the Revenue Recognition Principle?
1. During production (long-term production cycle) 2. End of production (if active market and clear prices) 3. Upon receipt of cash (if collection is at risk)
Level 2: Qualitative Characteristics 3 ingredients of Relevance
1. Predictive value 2. Confirmatory vlaue 3. Materiality
Level 2: Qualitative Characteristics 2 Fundamental Qualities
1. Relevance 2. Faithful Representation
What is Consistancy?
A type of Comparability. Information is reported in the same way from period to period.
What is Completeness?
All information is provided
What is the Going Concern Assumption?
Company is not going bankrupt and will continue operations. Value assets using historical cost, not liquidation approach.
What is the Economic Entity Assumption?
Company is separate from owners and other companies, unless there is a controlling interest.
What is the Monetary Unit Assumption?
Ignore inflation.
What is Verifiability?
Independent measurers get the same result.
What is Neutrality?
Information is not selected to favor any particular party
What is Comparability?
Information reported in the same way by different companies.
What is predictive value?
Information which has value as an input to the predictive process
What is confirmatory value?
Information which helps confirm or correct prior expectations
What is Free from Error?
Information which is accurate
What is Materiality?
Information which, if omitted or misstated, would influence decisions.
What is Understandability?
Informed users can understand the significance of the information.
What is Faithful Representation?
Numbers and descriptions match what actually happened.
What is the Full Disclosure Principle?
Provide all info that would influence decisions.
What is the Expense Recognition Principle?
aka Matching Principle Recognize expenses in the same period as revenue earned, if they are directly related
