Conceptual Framework of Financial Reporting

Question 1

Cost Constraint

Answer 1

on GAAP limits recognition & disclosure IF the cost of providing the information exceeds its benefit

Firms may NOT omit disclosure IF they are MATERIAL or MANDATED by GAAP

Question 2

Fair Value

Answer 2

IF fv of an asset/liab is available, there is NO need to use present-value measurement

Question 3

Present Value

Answer 3

There are two ways to incorporate the risk associated with cash flows

1. The result should be as close as possible to FV if such a value could be obtained
2. The expected cash flow approach is PREFERRED. present value measurements should reflect the uncertainties inherent in the estimated cash flows

Question 4

PV 2 ways:
Discounted Cash Flows

VS.

Expected Cash Flows

Answer 4

1. Single cash flow value discounted using the risk adjusted rate; uses interest rate to capture all the uncertainties/risks inherent in a cash flow measure
2. Probability weighted cash flows discounted using the risk-free rate; USES expectations about ALL possible cash flows instead of a single most likely cash flow; Preferred method