Conceptual Framwork-FAR

-Balance sheet includes (3)

- ASSETS -LIABILIITIES -CAPITAL

-Accounting Equation

- Assets=Liabilities + Capital -Assets of business = Liabilities of business

-Economic entity/ Entity concept Assumption

- The economic activity can be identified with a particular unit of accountability. -The business activity is separate and distinct from its owners (and any other business unit) -An individual, departments or divisions of an entity, or an entire industry may be considered separate entities -Does not necessarily refer to a legal entity -For tax and legal purposes, considered a legal entity

-Usefulness of a Conceptual Framework

-* Establishes objectives of fin. reporting -*Creates standards for the accounting profession -*Increases fin. statement users' understanding of and confidence of financial reporting -*Enhances comparability of fin. statements of different companies

-1)Users of Accounting Information -2)Constraints -3)User-Specific Qualities -4)Persuasive Criterion -5)Primary Qualities -6)Ingrediants of Primary Qualities -7)Secondary Qualities

-1) Decision Makers and their characteristics -2)-Cost<Benefits (Pervasive restraint) -Materiality (Threshold for recognition) -3)Understandability -4)Decision Usefulness -5)Relevance-Reliability -6)Predictive Value ,Feedback Value , Timeliness, Verifiability, Representational Faithfulness, Neutrality -7)Comparability, Consistency

-What are the 4 principles of accounting used to record transactions?

-1) Historical Cost -2) Revenue Recognition -3) Matching -4) Full Disclosure

-What are the 4 assumptions that underlie the financial accounting structure?

-1) economic entity -2) going concern -3) Monetary Unit -4 Periodically

-1) Historical Cost Principle

-1) the advantage of historical cost over other valuation methods is that it is reliable, - Assets=Exchange Price -However, we use a "mix attribute" system where debt and equity securities are reported at Fair Market Value, receivables are reported at Net Realizable, and inventories are reported at the lower of coast or market

What are the secondary qualities of qualitative characteristics?

-1. Comparability -2. Consistency

What are the three requirements of relevance?

-1. feedback value -2. predictive value -3. timeliness

What are the three requirements of reliability?

-1. neutrality -2. verifiability -3.representational faithfulness

-Historical Cost Principle

-3 basic assumptions: 1. Represents a value at a point in time 2. Results from a reciprocal exchange (i.e. a two-way exchange) 3. Exchange includes an outside party

The definition of the conceptual framework is?

-A coherent system of interrelated objectives and fundamentals that can be lead to consistent standards that prescribe the nature,function,and limits of financial accounting and financial statements.

Primary Quality 2)Reliability

-Accounting information is reliable to the extent that it is verifiable, is a faithful representation, and is reasonably free or error and bias. -It is necessary for individuals who have neither the time nor the expertise to evaluate the factual content of the information

Primary quality 1) Relevance

-Accounting information must be capable of making a difference in a decision -For information to be relevant it should have predictive or feedback value, and it must be presented timely

-Capital transactions

-Affect organization in the long term -Expenditure and disposal of non-current assets -Obtaining and repayment of non-current finance -Initially affect the figures on the balance sheet

_Information is understandable if it

-Allows reasonably informed users to see the significance of the information -Provides "enough" information so that it is clear

-Information is comparable if it:

-Allows users to identify real similarities and differences for different companies -Has been measured and reported in a similar manner

What are the basic elements that describe the - amount of resources and - claims to resources - at a moment in time?

-Assets, -Liabilities, -Equity

-Going Concern Assumption

-Assumption that a business will continue to operate to meet its objectives and commitments -at least another 12 months from B/S date -If liquidation is likely, use liquidation accounting 9at net realizable value) -Full disclosure is required of any material uncertainties of continuing as a going concern

Predictive Vaue is...

-Characteristic of Relevance -It is when accounting information helps users to make predicitions about the ultimate outcome of past, present , and future events.

To calculate cost of goods sold

-Cost of opening inventories + Cost of purchases during the period. Less cost of closing inventories

-Expenses

-DECREASES IN ECONOMIC resources, from an entity's ORDINARY revenue-generating activities

-Losses

-DECREASES in equity from INCVIDENTAL transactions

-Losses is defined as..

-Decreases in equity (NET ASSETS) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

-Distributions to owners is defined as..

-Decreases in net assets of a particular enterprise resulting from transferring assets,, rendering services, or incurring liabilities by the enterprise to owners. -Distributions to owners decrease ownership interests (or equity) in an enterjprise

-Periodicity Assumption

-Economic activity of an entity can be divided into artificial time periods for reporting purposes -Most common" 1 month, 1 quarter and 1 year -For shorter time periods, more difficult to determine proper net income (i.e. the more likely errors become due to more estimates) -Trade-off between relevance and reliability -With technology, investors want more on-line, real-time financial information to ensure relevant information

Definitions of (SFAC) Statement of Financial Accounting Concepts 6

-Elements of Financial Statements -replaces SFAC No. 3 and expands it's scope to include not-for-profit organization.

Definitions of (SFAC)- Statement of Financial Accounting Concepts 3

-Elements of Financial Statements of Business -provides definition of items in financial statements, such as assets, liabilities, revenues, and expenses.

-Net profit

-Gross profit - all other expenses

-Information is relevant if it:

-Has predictive value (helps users - predict final outcome of past, present, future events) -Makes a difference - Has feedback value helps confirm/correct users' previous expectations. -Is timely - (must be available to decision-makers before it loses its ability to influence their decisions.

-Revenues

-INCREASES in economic resources from an entity's ORDINARY activitie

-Third Level: Recognition and Measurement

-Implements the basic objectives of level one. Describes which, when , and how financial elements and events should be recognized, measured, and reported by the accounting system as set forth in SFAC5.

-4) Periodically (time period) assumption

-Implies that the economic activities of an enterprise can be divided into artificial time periods. - The most common are monthly, quarterly, and yearly. -NOTE: the shorter the time period, the more difficult it is to determine net income for the period. -Results for a month is less reliable then a quarter and so on. -However, product cycles are becoming shorter. Thus is the trade-off between relevance and reliability in preparing financial data.

-Define Separate Entity Convention

-In Ltd companies the law recognizes the individual as being separate from the business, not so in sole trading and partnerships

-Gains

-Increase in equity (net assets) from INCIDENTAL transactions

-Gains is defined as..

-Increases in equity (NET ASSETS) from peripheral or incidental transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners

-Investments by owners is defined as..

-Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain an increase ownership in interests(or equity) in it. -Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise.

-Revenues is defined as..

-Inflows or other enhancements of assets of an entity or settlement of it's liabilities (or a combination of both) during a period form delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

Secondary Quality -1) comparability

-Information that has been measured and reported in a similar manner for different enterprises is considered comparable

-What basic elements describe the transactions , events and circumstances that affect an enterprise during a period of time?

-Investments by Owners, -Distributions to owners, -comprehensive income, -revenues, -expenses, -gains, -losses

-Information is reliable if it:

-Is verifiable (similar results achieved if same measurement methods are used) -faithfully represents what actually happened -is neutral

What are the 3 levels that compose the Conceptual framework?

-Level 1) Basic Objective (goals and purpose of accounting) -Level 2) Fundamental Concepts(the bride between) -Level 3)Recognition and Measurement Concepts (implementation of these goals and purpose)

Monetary Unit

-Money is the common unit fo measure of economic transactions -Use of a monetary unit is relevant, simple and understandable, universally available, and useful -In Canada and US, $ is assumed to remain relatively stable in value (effects of inflation/Deflation are ignored i.e. price-level change is ignored - Monetary unit is relevant only as long as it is assumed that quantitative data are useful in communication economic information

Definitions of (SFAC) Statement of Financial Accounting Concepts 1

-Objectives of Financial Reporting by Business Enterprise -presents the goals and purpose of accounting

-Define Liability

-Obligation to pay money as a result of a transaction

-Tradeoffs of qualities

-Often must make a tradeoff between relevance (timeliness of financial information) and reliability of financial information. -Needs of the users must be considered

-Expenses is defined as..

-Outflows or other using up assets or incurrence of liabilities (or a combination of both) during a period from delivering or producing foods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.

-Define Receivable

-Person owing money to an entity

-Define Payable

-Person to whom money is owned due to s service or goods being received

Definitions of (SFAC) -Statement of Financial Accounting Concepts 2

-Qualitative Characteristics of Accounting Information -examines the characteristics that make accounting information useful.

Definition of (SFAC)- Statement of Financial Accounting Concepts 5

-Recognition and Measurement in Financial Statements of Business Enterprises -Set forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when.

What are the primary qualities of qualitative characteristics?

-Relevance -Faithful Respresntation

What are the 2 primary qualities that make accounting information useful for decision making.

-Relevance -Reliability

-Define Equity..

-Residual interest in the assets of an entity that remains after deducting it's liabilities. -In business enterprise, the equity is the ownership interest.

- Define Asset

-Resource which may be used to generate revenue in the future

2) Revenue Recognition Principle

-Revenue should be recognized when 1) realized or realizable and 2) earned.

-Income Statement Accounts

-Revenues -Expenses -Gains -Losses -Other comprehensive income

-Income statement layout

-Sales -Less: cost of goods sold -Less: expenses -Equals Net profit

-Gross profit

-Sales revenue - cost of goods sold

-Information is consistent if:

-Similar events have the same accounting treatment from period to period

Describe the FASB's efforts to construct a conceptual framework.

-The FASB issued six STATEMENTS of FINANCIAL ACCOUNTING CONCEPTS that relate to financial reporting for business enterprise. -These concept statements provide the basis for the conceptual framework. -They include objectives, qualitative characteristics and elements. -In addition, measurement and recognition concepts are developesd

Describe the usefulness of a conceptual framework

-The accounting profession needs a conceptual framework to 1. build on and relate to an established body of concepts and objectives 2. Provide a framework for solving new and emerging practical problems 3. Increase financial statement users' understanding of and confidence in financial reporting, and 4. Enhance comparability among companiees' financial statements.

-2) going concern assumption

-The business enterprise will have a long life (enough to fulfill their objectives and commitments).

Identify the qualitative characteristics of accounting information

-The overriding criterion by which accounting choices can be judged is decision usefulness-- that is, providing information that is moist useful for decision making. -Relevance and reliability are the 2 primary qualities. -Comparability and consistency are the secondary qualities that make accounting information useful for decision making.

Definition (SFAC) Statement of Financial Accounting Concepts 7

-Using Cash Flow Information and Present Value in Accounting Measurements -provides a framework for using expected cash flows and present values as a basis of measurement.

Secondary Quality 2) Consistency

-When an entity applies the same accounting treatment to similar events, from period to period, the entity is considered to be consistent in its use of accounting standards

_Revenue transactions

-affect organization in the current period -include sales, running costs etc. -Affect figures in the income statement

-According to SFAC 5 to be recognized..

-an item, event, or transaction, must meet the definition of an "element of financial statements" ( as defined in (SFAC 6) and must be measurable.

-Articulation is the interaction of..

-assets, liabilities, and equity is changed by elements o the other basic elements( ex. investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains,losses) amd at amu time is the cumulative results of all changes. -Key figures in one statement corresponds to balances in another

-Comphrehensive income is defined as..

-changes in equity (NET ASSETS) of an entity during a period from transactions and other events and circumstances from non-owner sources. _It includes all changes in equity during a period except those resulting from non-owner sources. -It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Verifiability is..

-demonstrated when independent measures, using same measurement methods, obtain similar results.

-Liabilities

-duty/responsibility -results from past transaction -unavoidable

-1) economic entity assumption

-economic activity can be identified with a particular unit of accountability, meaning, the activity of a business enterprise can be kept separate and distinct from its owners and any other business unit.

-Foundational concepts and constraints

-explain which, when , and how financial elements and events should be recognized, measured, and presented. They act as guidelines for developing rational responses to controversial financial reporting issues.

-Assets

-have future economic benefit -results from past transaction -entity controls access to benefit

Neutrality means..

-information cannot be selected to favor one set of interested parties over another. -Factual,truthful, unbiased information must be the overriding consideration

What is conceptual framework?

-it's like a constitution -a system of fundamentals that can be lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and statements.

-3) Monetary Unit assumption

-money is the common denominator of economic activity and provides and appropriate basis for accounting measurement and analysis, -Implies that the monetary unit is the moist effective means of expression to interested parties changes in capital and exchanges of goods and services

Define Assets..

-probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

-Define Liabilities..

-probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

-Revenue is realized when...

-products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash.

-Initial historical cost recognition for non-financial assets

-record all costs incurred to get the asset "ready" for sale or for use (e.g. includes transportation and installation costs0

Feedback Value is

-relevant information that helps users confirm or correct prior expectations.

-Equity/Net Assets

-residual interest -i.e. net worth (Assets-liabilities)

Representational Faithfulness means..

-the numbers and descriptions represent what really existed or happened and therefor are reliable.

-Revenue is realizable..

-when assets received or held are readily convertible into cash or claims to cash

Timeliness is..

-when information is available to decision makers before it loses it's capacity to influence their decisions. -It's required for information to the relevant.

-Revenue is considered earned..

-when the entity has substantially accomplished what it must do to be entitled to benefits represented by the revenues.

What are the secondary qualities of accounting information?

1) Comparability 2) Consistency

Explain the application of the basic principles of accounting.

1. Measurement Principle: GAAP permits the use of historical cost, fair value, and other valuation bases. Although historical cost principle (measurements based on acquisition price- continues to be an important basis for valuation, recording and reporting of fair value information is increasing. 2. Revenue recognition principle: A company generally recognizes revenue when (a) realized or realizable and (b) earned. 3. Expense recognition principle: As a general rule, companies recognize expenses when the service or the product actually makes its contribution to revenue (commonly referred to as matching). 4. Full disclosure principle: Companies generally provide information that is of sufficient importance o influence the judgment and decisions of an informed user.

Estimate 'fair value" for

1. Non-monetary transactions (as no cash/monetary consideration exchanged) 2. Non-reciprocal transactions (e.g. donations) 3. Related party transactions- not acting at "arm's length" (use exchange value or cost)

-Conceptual Framework: Qualitative Characteristics

1. Understandability 2. Relevance 3.Reliability 4.Comparability 5.Consistency

Choosing an acceptable accounting method, the amount and types of information to be disclosed, and the format in which information should be presented involves determining which alternatives provides the most useful information for decision making purposes, Also known as ...

Decision Usefulness

-Understand the objectives of financial reporting,

Financial reporting should provide information that is 1. Useful to those making investment and credit decisions who have a reasonable understanding of business activities. 2. Helpful to present and potential investors, creditors, and others in assessing future cash flows. 3. And about economic resources and the claims to and changes in them.

Describe the basic assumptions of accounting

Four basic underlying financial assumptions are: 1. Economic entity: the activity of a company can be kept separate and distinct from its owners and any other business unit 2. Going concern: the company will have a long life. 3. Moneytary unit: Money is the common denominator by which economic activity is conducted and the monetary unit provides an appropriate basis for measurement and analysis. 4. Periodicity: The economic activities of a company can be divided into artificial time periods.

What does the qualitative characteristics of accounting do?

It distinguishes accounting information from better/more useful information from inferior/less useful information for decision making purposes.

Define understandability

Quality of information that permits reasonably informed users to preceive its significance

Describe the impact that constraints have on reporting accounting information.

The constraints and their impact are: 1. Cost/benefit relationship: the cost of providing the information must be weighted against the benefits that can be derived from using the information. 2. Materiality: Sound and acceptable standards should be followed if the amount involved is significant when compared with other revenues and expenses assets and liabilities, or net income of the company. 3.Industry Practices: Follow the general practices in the company's industry, which sometimes requires departure from basic theory. 4. Conservatism: When in doubt choose the solution that will be least likely to overstate net income.

Level 1-Basic Objectives of the Conceptual Framework is what?

To provide useful information that is -1) useful to those making investment and credit decision who have a reasonable understanding of business and economic activities -2) helpful to present and potential investors, creditors , and other user in assessing the amounts, timing, and incertainty of future cash flows and -3) abount economic resources, the claims to these resources and changes in them.