Chapter 2 - Conceptual Framework for Financial Accounting

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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


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