Chapter 2 - Conceptual Framework For Financial Reporting

Question 1

A Conceptual Framework

Answer 1

• helps to decide how to develop new standards
• helps ensure more useful and consistent pronouncements over time
• used to solve new problems

Question 2

Levels of the Conceptual Framework

Answer 2

1st Level: Objective of Financial Accounting (the why we do what we do)

2nd Level: Qualitative Characteristics and Elements (the what we do)

3rd Level: Recognition, Measurement, and Disclosure concepts (the how we do)

Question 3

1st Level of Conceptual Framework

Answer 3

• the objective, the why we do
• to provide financial information about reporting entity that is useful to present and potential external users in making decisions about providing resources to the entity

Question 4

A Qualitative Characteristic

Answer 4

• Help distinguish useful information from less useful information
• Superior information from inferior information

Question 5

Fundamental Qualities

Answer 5

Relevance

• predictive value
• confirmatory value
• materiality

Faithful Representation

• completeness
• neutrality
• free from error

Question 6

Enhancing Qualities

Answer 6

• Comparability
• Verifiability
• Timeliness
• Understandability

Question 7

Relevance

Answer 7

• Fundamental Quality

- accounting information that is capable of making a difference in a decision

Question 8

Predictive Value

Answer 8

• Ingredient of fundamental quality (relevance)
• financial information has this if it has value to investors for making their own expectations about the future
• able to make predictions about an entity with the information

Question 9

Confirmatory Value

Answer 9

• ingredient of fundamental quality (relevance)

- information helps users confirm their prior expectations or correct them

Question 10

Materiality

Answer 10

• ingredient of fundamental quality (relevance)
• if that piece of information is left out or not stated correctly, may make a difference in someone’s decision
• subjective

Question 11

Faithful Representation

Answer 11

Fundamental Quality

• numbers and descriptions match what actually happened/existed

Question 12

Completeness

Answer 12

• ingredient of fundamental quality (faithful representation)
• we’ve included everything that needs to be included
• all information the users need, is present

Question 13

Neutrality

Answer 13

• ingredient of fundamental quality (faithful representation)
• neutral
• financial information does not favor one set of interested parties over another
• mo bias when creating the information

Question 14

Free from Error

Answer 14

• ingredient of fundamental quality (faithful representation)
• make sure basic financial statements are free from error

Question 15

Enhancing Qualities

Answer 15

• bridge between both fundamental qualities

- distinguishes more-useful information from less-useful

Question 16

Comparability

Answer 16

• enhancing quality
• information measured and reported in a similar manner
• to be able to compare financial information, needs to be similar in how it was measured & reported

Question 17

Verifiability

Answer 17

• enhancing quality

- independent measurers, using same methods, obtain similar results

Question 18

Timeliness

Answer 18

• enhancing quality

- having information available before it loses its capacity to influence decisions

Question 19

Understandability

Answer 19

• enhancing quality

- information provided is understood by the users

Question 20

Basic Elements

Answer 20

Assets
- what we own

Liabilities
- what we owe

Equity
- what we’re worth

Investments by Owners
- money or property that owners put into a business

Distributions to Owners
- funds owners take from business as it grows

Comprehensive Income

• change in equity
• look at from non-owner sources

Revenues
- what we’re in business to do

Expenses
- what we incur in our business to carry it on

Gains & Losses
- from things we’re not in the normal business to do

Question 21

2nd Level of Conceptual Framework

Answer 21

• the what we do
• Qualitative Characteristics
• Basic Elements of Financial Statements

Question 22

3rd Level of Conceptual Framework

Answer 22

• the how we do

Recognition
- Assumptions

Measurement
- Principles

Disclosure Concepts
- Constraint

Question 23

Economic Entity

Answer 23

Assumption

• the business is separate from anything else

Question 24

Going Concern

Answer 24

Assumption

• the company is going to last a long period of time

Question 25

Monetary Unit

Answer 25

Assumption

• money is the common denominator
• we use dollar in the U.S.
• international gets tricky

Question 26

Periodicity

Answer 26

Assumption

• can take financial information and break it up into different time frames

Question 27

Measurement Principle

Answer 27

Historical Cost
- what we paid for when we acquired it

Fair Value
- it’s value today

Question 28

Matching Principle

Answer 28

Revenue Recognition & Expense Recognition

• expenses are recorded in the same time period they helped generate revenues

Question 29

Revenue Recognition Principle

Answer 29

Cash-basis
- revenue recognized when you get cash in hand

Accrual-basis

• step 1: identify contract w/ customer
• step 2: identify separate performance obligations in contact
• step 3: determine transaction price
• step 4: allocate transaction price to separate performance obligations
• step 5: recognize revenue when each performance obligations satisfied

Question 30

Expense Recognition Principle

Answer 30

• matching expenses to revenues they help generate
• product costs
• period costs

Question 31

Full Disclosure Principle

Answer 31

• providing extra information

- stuff with sufficient importance to influence the judgement and decisions of a user

Question 32

Cost Constraint

Answer 32

• cost of providing information must be weighed against benefits derived from using it
• can only do so much before it’s starts costing too much