ACC 301 chp2
FASB & IASB conceptual framework
fundamental qualitative characteristics. in order for accounting info to be *useful* it must have *both*: -relevance -faithful representation
Faithful Representation(definition)
-accounting information is reliable to the extent that users can depend on it to represent the economic conditions or events that it purports to represent
Faithful Representation(3 must include)
-completeness provides users with full disclosure of information necessary to understand the items being reported upon -neutrality implies that the information is not biased to achieve a predetermined result or to influence a certain group of users. -free from error emphasizes the magnitude of the omission or error and the impact on the decision making process. does it matter?
Objectives of financial reporting
-info that is *useful* to present and potential investors, creditors, and other users in making economic decision. -info to help present and potential investor, creditors, and other users in assessing the amount, timing and uncertainty of *future cash flows* -info about the economic *resources* of an enterprise, the *claims* on those resources and the *changes* in them -info about a company's comprehensive income and its components.
development of a conceptual framework
-prior to the FASB earlier attempts have failed -the FASB has issued 5 statements of financial accounting concepts(SFAC) that comprises the conceptual framework for business enterprise. -the SFAC deals w/ 3 conceptual levels -SFAC No.8 is the result of a joint effort by FASB and the IASB and will supersede prior SFAC's.
conceptual framework underlying financial accounting
-to provide guidelines in developing generally accepted accounting principals -a basic accounting theoretical framework can provide practitioners with quick solutions to new and emerging practical problems -user understanding of and confidence in financial reporting will be increased -financial statements will be more relevant and reliable -comparability and consistency amount companies financial statements will be enchanced
elements at a moment in time
1.assets 2.liabilities 3.equity
constraints modifying basic theory
1.cost-benefit relationship 2.conservatism
Revenue recognition principle(The Exceptions to the rule)
1.during production- percentage of completion method is used in the construction industry 2. end of production- certain minerals and agricultural products where a ready market at a standard price exists 3.recipt of cash- installment sales accounting where it is impossible to establish the revenue amount at the time of sale because the ability to collect cannot be estimated
elements during a period of time
1.investments by owners 2.distributions to owners 3.comprehensive income -newer concept, its more inclusive than our traditional concept of net income& includes unrealized gains/lose not recognized on the income statement 4.Revenues 5.Expenses 6.Gains 7.Losses
materiality(4 meanings behind it)
1.must make a difference 2.realtive size and importance must be considered 3.materiality requires considerable judgement 4. immaterial items must still be recorded but need not be separately disclosed
The change in net assets during a period from transactions and other events and circumstances from non-owner sources is called; A)comprehensive income. B)revenues. C)gains. D)net income.
A)Comprehensive income is the change in net assets during a period from transactions and other events and circumstances from non-owner sources.
Under current GAAP, inflation is ignored in accounting due to; A)the monetary unit assumption. B)consistency. C)the going concern assumption. D)materiality.
A)Inflation is ignored under the monetary unit assumption.
Generally, revenues are recognized when the: A)performance obligation is satisfied. B)product is produced. C)all of these answer choices are correct. D)cash is received.
A)When a company satisfies the performance obligation to perform services or sell a product, revenue is recognized.
Which of the following statements about the fair value principle is true? A)Measurements based on fair value increase the objectivity in financial reporting. B)Fair value is a market-based measure. C)Fair value is generally less relevant than historical cost. D)GAAP requires the use of fair value for financial assets and financial liabilities.
B) Fair value is more relevant, more subjective, and GAAP gives companies the option of using fair value for financial assets and financial liabilities.
Enhancing qualities of accounting information include: A)relevance and faithful representation. B)comparability and verifiability. C)comparability and materiality. D)relevance and consistency.
B) The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability.
Which of the following statements is true regarding the convergence project by the FASB and IASB? A)The converged framework will be a series of documents, similar to the two conceptual frameworks that presently exist. B)The IASB framework makes two assumptions. C)The FASB framework discusses accrual accounting and identifies it as an assumption. D)The existing conceptual frameworks underlying U.S. GAAP and IFRS are quite dissimilar, but once they are converged there will be unanimity.
B)The IASB framework makes two assumptions - accrual basis and going concern. The converged framework will be a single document, the existing frameworks are very similar, and while the FASB framework discusses accrual accounting, it does not identify it as an assumption.
Depreciation and amortization policies are justifiable and appropriate because of the: A)economic entity assumption. B)going concern assumption. C)monetary unit assumption. D)periodicity assumption.
B)The going concern assumption is the justification for depreciation and amortization.
The conceptual framework for financial reporting consists of how many levels? A)1 B)2 C)3 D)4
C)3, the "Why", the Bridge between levels 1 & 3, and the "How".
An increase in net assets arising from peripheral or incidental transactions is called a(n); A)asset. B)revenue. C)gain. D)investment by owners.
C)An increase in net assets from peripheral or incidental transactions is called a gain.
In the conceptual framework for financial reporting, what provides "the how" - the implementation of accounting? A)Elements of financial statements. B)Objective of financial reporting. C)Measurement and recognition concepts such as assumptions, principles, and constraints. D)Qualitative characteristics of accounting information.
C)The "how" or the implementation of accounting is provided through the recognition, measurement, and disclosure concepts.
Enhancing qualities of accounting information include all of the following except: A)timeliness. B)understandability. C)neutrality. D)comparability.
C)The enhancing qualities of accounting information include comparability, verifiability, timeliness, and understandability.
Generally accepted accounting principles; A)derive their authority from legal court proceedings. B)are fundamental truths or axioms that can be derived from laws of nature. C)derive their credibility and authority from general recognition and acceptance by the accounting profession. D) have been specified in detail in the FASB conceptual framework.
C)derive their credibility and authority from general recognition and acceptance by the accounting profession.
the underlying theme of the conceptual framework is; A)understandability. B)reliability. C)comparability. D)decision usefulness.
D)Decision usefulness is the underlying theme of the conceptual framework.
In order to be relevant, financial information must have: A)freedom from error. B)neutrality. C)comparability. D)confirmatory or predictive value.
D)Relevant information has predictive value or confirmatory value (or both), and is material.
Which of the following is not among the ingredients of the fundamental quality of faithful representation? A)completeness. B)freedom from error. C)neutrality. D)materiality.
D)The ingredients of faithful representation include completeness, neutrality, and freedom from error.
T or F; Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point GAAP has adopted it more broadly.
False, Both GAAP and IFRS are increasing the use of fair value to report assets, but at this point IFRS has adopted it more broadly.
T or F; For information to be relevant, it must have both predictive value and confirmatory value.
False, For information to be relevant, it needs to have predictive value or confirmatory value or both.
T or F; The difficulty in cost-benefit analysis is that the benefits are usually evident and easily measurable, while the costs are not always evident or measurable.
False, The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.
T or F; The existing conceptual frameworks underlying IFRS and GAAP are strikingly different and the FASB and IASB will likely change many aspects of each of the frameworks in order to create a common conceptual framework.
False, The existing conceptual frameworks underlying IFRS and GAAP are very similar and there is no need to change many aspects of the existing frameworks.
T or F; The periodicity assumption specifies that the most appropriate time periods for financial reporting are weekly, bi-monthly, and yearly.
False; The periodicity assumption suggests that the economic life of a business can be divided into artificial time periods such as a month, quarter or year.
T or F; A contract is an agreement between two parties that creates enforceable rights or obligations
True, A contract is an agreement between two parties that creates enforceable rights or obligations.
Relevance
accounting info is relevant if it is capable of making a difference in a decision & should include: -predictive value allows users to make predictions or speculation on future events& performance OR -confirmatory value allows users to assess and confirm or correct prior expectations -materiality: the magnitude of an omission or misstatement of accounting data and how this affects users.
understandability
accounting info should be comprehended by knowledgeable users
Comparability
accounting info that has been measured and reported in a similar manner for different enterprises is considered comparable...also covers consistency.
consistency
accounting information is consistent when an entity applies the same accounting treatment from period to period to similar accountable events
verifiability
addresses whether the method has been used without error and would another accountant arrive at similar results
historical cost principal
assets and liabilities are reported on the basis of acquisition price 1.exisiting GAAP requires historical cost for most assets and liabilities 2.acquisition cost is the most objective and verifiable valuation basis
going concern assumption:
continuity of existence is assumed for business enterprises
matching principle
effort(expenses) should be matched with accomplishments(revenues) whenever feasible 1.when direct association exists, expense cost against revenues in the period when revenue is recognized 2.when association exists but is difficult to identify, allocate cost rationally and systematically to expense in the periods benefited -when little, if any, association exists, expense immediately
timeliness
is the infer available in time to influence users
full disclosure principle
providing info that is of sufficient importance to influence the judgement and decisions of an informed user. this is accomplish through: 1. the financial statements 2.the notes to the financial statements 3.supplementary info
revenue recognition principle
revenue is recognized when the earnings process is virtually complete and an exchange transaction has occurred.
cost-benefit relationship-
the benefits derived from having accounting info should exceed the cost of providing it.
Economic Entity assumption
the business enterprise is kept separate and distinct from its owners and is accountable
monetary unit assumption:
the dollar is the most effective means of expressing to interested parties changes in capital and exchanges of goods and services. these dollars are assumed to remain relatively stable over the years and any inflation or deflation is disregarded
periodicity assumption
the economic activities of an enterprise can be divided into artificial time periods commonly know as the fiscal year
conservatism-
when in doubt accountants choose the measurement scheme that will be the *least likely to overstate assets and income*. skepticism is followed and not a deliberate understatement.(i.e. write assets down but not up- lower of cost or market)