Basic Concepts Flashcards
Qualitative Characteristics of Useful Information - Primary Characteristics (Relevance)
Relevance - Capable of making a difference in a user’s decision-making process. Made up of:
- Predictive Value: Helps decision makers predict or forecast future results
- Confirmatory Value (Feedback Value): Confirms or corrects prior predictions
Qualitative Characteristics of Useful Information - Primary Characteristics (Faithful Representation)
Faithful Representation - Information depicts what it intends to represent. Made up of:
- Free from Error: No errors or emissions
- Neutrality: Free from bias
- Completeness: All information necessary to users is provided
Enhancing Qualitative Characteristics of Useful Information
Comparability – Same principles being used with business enterprises in similar Industry.
- Consistency: Same accounting methods in different periods.
Understandability – Classifying, characterizing and presenting information clearly and concisely.
Timeliness – Information is available early enough to influence decisions.
Verifiability – Independent knowledgeable observers would agree.
Constraints of Useful Information
Cost/Benefit Constraint - Cost of obtaining and presenting information should not exceed the benefits.
Materiality - Capable of making a difference in the user’s decision-making process if omitted or misstated.
Elements of Financial Statements - Assets
An economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred.
Elements of Financial Statements - Liabilities
An economic obligation in which one needs to use or transfer an asset, it can’t be avoided and the transaction has already occurred.
Elements of Financial Statements - Equity
Assets left over after deducting liabilities. Consists of 3 elements:
- Investments by Owners (Contributions)
- Distributions to Owners (Dividends)
- Comprehensive Income: All changes in equity other than “owner” sources
Elements of Comprehensive Income
Revenues - Inflows from an entity’s primary operations.
Expenses - Outflows due to an entity’s primary operations.
Gains - Increases in equity from incidental transactions.
Losses - Decreases in equity from incidental transactions.
Capital Maintenance Concept
Physical Capital Maintenance Concept - An event is recognized when an asset is sold or a liability is settled.
Financial Capital Maintenance Concept - An event is recognized as a change in the value of an asset or liability occurs (recognizes holding gains and losses).
General Accounting Rules & Concepts - Recognition
Reporting an item in the financial statements (i.e., booking it).
General Accounting Rules & Concepts - Realization
Converting noncash resources into cash or a claim to cash.
General Accounting Rules & Concepts - Matching
Recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized.
When to Recognize Financial Statement Elements
Meets definition – The item meets the definition of an element.
Measurable – Element is capable of being measured in monetary terms.
Relevant – The item is capable of making a difference in user decisions.
Reliable – The information is faithfully represented and verifiable.
Credit Loss
A loss recognized in the income statement from the decline in value of a financial asset (eg, receivables) that results from the expected inability of the debtor to make all payments called for in the instrument.
Credit Loss - Discounted Cash Flow Method
A method used to estimate credit losses by determining the present value of the expected future cash flows.
Credit Loss - Loss-Rate Method
A method used to estimate credit losses as a percentage of total exposure.
Credit Loss - Aging Method
A method used to estimate credit losses where the instruments are stratified, often on the basis of when they will mature, and different percentages are applied to each stratum.
Credit Loss - Roll-Rate Method
A method used to estimate credit losses on the basis of the time required for the conversation cycle, the period required for instruments to be realized.
Credit Loss - Probability-of-Default Method
A method used to estimate credit losses by multiplying a likelihood that an instrument will be defaulted upon by the balance of the instrument.
Purchased Financial Assets with Credit Deterioration (PCD Assets)
A financial asset acquired with a more-than-insignificant credit deterioration, likely purchased at a larger discount because of the potential for credit loss. Such discount must be allocated between market risk and credit risk.
Fair Value Measurement
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
