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