Conceptual Framework of Financial Reporting - Chpt 1, 2, & 3

What does the Expense recognition principle state?

Recognize expenses only when expenditures help to produce revenues, allocating expenses to revenues in the proper period.

What are the Primary Qualitative Characteristics of Financial Information useful for decision making?

Relevance, Faithful representation

What is the periodicity assumption?

The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes

List the enhancing qualitative characteristics of financial information.

1. Comparability; 2. Verifiability; 3. Timeliness; 4. Understandability

What does the historical cost accounting principle state?

Assets and liabilities are recorded at historical cost, that is, their cash equivalent amount at time of origination. This value is the market value of the item on the date of acquisition. The fair value changes subsequent to purchase are not recorded in the accounts.

What is the Monetary unit assumption?

Assumes that the dollar is the "measuring stick" used to report on financial performance. Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated.

What are the ingredients of Faithful representation?

Completeness, Free from error, Neutrality

Who is the Target Audience of Financial Statements?

Decision makers; mainly potential investors, creditors, and regulators

What does the full disclosure principle state?

Financial statements should present all information needed by an informed reader to make an economic decision.

Understandability

For information to be useful there must be a connection between these users & the decisions they make. This link, __________, is the quality of information that lets reasonably informed users see its significance.

GAAP

Generally Accepted Accounting Principles are a set a standards and procedures that have been proven through application to be most useful in the financial community.

What is the going concern assumption?

In the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue to be a going concern. Rationale why plant assets are not reported at liquidation value.

What is completeness?

Information is complete if it includes all data necessary to be faithfully representative.

What does it mean to be free from error?

Information is free from error if it is accurate and truthful

What are the Ingredients of Relevance?

Predictive value, Confirmatory value, Materiality

What is Comparability?

The quality of information that enables users to identify similarities and differences between sets of information.

GAAP

Three organizations are instrumental in the development of GAAP in the US, they are Securities & Exchange Commission - SEC, American Institute of Certified Public Accountants - AICPA, and the Financial Accounting Standards Board - FASB.

What is Neutrality?

To be neutral, accounting information must be free of bias

What is Timeliness?

To be relevant, accounting information must be received in time to make a difference to the decision maker.

Materiality

To be relevant, accounting information must make a difference or a company need not disclose it.

What is Confirmatory Value?

To be relevant, accounting information should assist decision makers in confirming or correcting prior predictions or expectations.

What is Predictive Value?

To be relevant, accounting information should assist financial statement users in making predictions about future events.

Relevance

To have __________, accounting information must be capable of making a difference in a decision.

What are Objectives of Financial Reporting?

To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions.

What is the economic entity assumption?

We assume there is a separate accounting entity for each business organization, indicating that personal & business record keeping should be separately maintained.

Faithful representation

__________ means that the numbers & descriptions match what really exist or happened.

Verifiability

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