Inverted Triangle

Materiality

an item is said to be material if its inclusion or omission would influence or change the judgment of a reasonable person; both quantitative and qualitative factors should be considered

Revenue Recognition

companies recognize revenue in the accounting period in which the performance obligation is satisfied

Comparability

identify the real similarities and differences in economic activities between companies.

Verifiability

indicating that similar results will occur when independent third parties (e.g., auditors) measure using the same methods.

Relevance

information capable of making a difference in a decision; To be relevant, information needs have predictive or feedback value and is material.

Faithful Representation

information must be complete, free from error, and neutral

Predictive Value

information must help users predict the ultimate outcome of past, present, and future events

Timeliness

information should be available to decision-makers before it loses its capacity to influence their decisions.

Confirmatory Value

it helps to confirm or correct prior expectations based on previous evaluations of financial reporting information

Economic Entity

keeping an enterprise's economic activity separate and distinct from that of its owners and any other business unit

Periodicity

a company can divide its economic activities into artificial time periods (monthly, quarterly, yearly)

Neutrality

a company cannot select information to favor one set of interested parties over another; unbiased

Going Concern

a company will continue in operation for the foreseeable future

Free from Error

accurate

Completeness

all necessary information is provided

Enhancing Qualities

(1) Comparability (2) Verifiability (3) Timeliness (4) Understandability

Assumptions

(1) Economic Entity (2) Going concern (3) Monetary Unit (4) Periodicity

Principles

(1) Measurement (2) Revenue Recognition (3) Expense Recognition (4) Full Disclosure

Fundamental Qualities

A. Relevance (1) predictive value (2) confirmatory value (3) materiality B. Faithful Representation (1) Completeness (2) Neutrality (3) Free from error

Constraints

Cost

Monetary Unit

money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis

Full Disclosure

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

Understandability

reasonably informed users see its significance.

Expense Recognition

the recognition of expenses is related to net changes in assets and earning revenues, that is, "let the expense follow the revenues."

Objective

to provide information about the reporting entity that is USEFUL to present to potential equity investors, lenders, and other creditors in their capacity as capital providers