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Flashcards in Ch 2 Deck (88):
1

Conceptual framework

Establishes the concepts that underlie financial reporting.

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Why do we need a conceptual framework?

To be useful, rule making should build in and relate to an established body of concepts.

The profession should be able to more quickly solve new and emerging practical problems by referring to an existing framework of basic theory.

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Framework should do what?

Increase financial statement users understanding of and confidence in financial reporting

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The conceptual framework was developed by whom?

FASB

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The conceptual framework would be a basis for setting what?

Accounting rules and for resolving financial reporting controversies.

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NO. 1 is

Objectives of financial reporting by business enterprises

Which presents the goals and purposes of accounting.

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No. 2

Qualitative characteristics of accounting information

Examines the characteristics that make accounting information useful

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No. 3

Elements of financial statements of business enterprises

Provides definitions of items in financial statements such as assets liabilities revenues and expenses.

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No. 5

Recognition and measurement in financial statements of business enterprises

Sets forth fundamental recognition and measurement criteria and guidance in what info should be formally incorporated into financial statements and when.

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No. 6

Elements of financial statements

Replaces no. 3 and expands its scope to include not for profit organizations

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No. 7

Using cash flow info and present value in accounting measurements

Provides a framework for using expected future cash flows and present values as a basis for measurement

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No. 8

Chapter 1 "objectives of financial reporting by business enterprises

Chapter 3 "qualitative characteristics of useful financial information"

Replaces no. 1 and no. 2

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First level of the framework is

Objective of financial reporting which is the foundation of conceptual framework

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The objective of general purpose financial reporting is to provide

Info about reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions about providing resources to entity.

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General purpose financial reporting

Helps users who lack the ability to demand all the financial information they need from an entity and therefore must rely at least partly on the information provided in financial reports.

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The second level of framework is

Conceptual building blocks that explain qualitative characteristics of accounting info

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How does a company choose an acceptable accounting method, the amount and types of info to disclose and the format in which to present it?

By determine which alternative provides the most useful info for decision making purposes

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FASB identified qualitative characteristics of account information that?

Distinguish better (more useful) information from inferior (less useful) info for decision making purposes.

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Fundamental quality : faithful representation

What are the ingredients of the fundamental quality?

Completeness
Neutrality
Free from error

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Faithful representation

The numbers and descriptions match what really existed or happened.

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Completeness

Means that all info that is necessary for faithful representation is provided.

Any omissions can cause info to be false or misleading and not helpful to users.

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Neutrality

Means that the company cannot select info to favor one set of interested parties over the other.

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Free from error

A info that is free from error will be a more accurate (faithful) representation of financial item.

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Faithful representation does not imply what?

Total freedom from error.

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Fundamental quality: relevance

Ingredients of fundamental quality

Predictive value
Confirmatory value
Materiality

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Relevance

Acct info must be capable of making a difference in a decision.

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Predictive value

Financial info has predictive value if it has value as input to predictive processes used by investors to form their own expectations about future.

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Confirmatory value

Relevant info also helps users confirm or correct prior expectations

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Materiality

Is a company specific aspect of relevance.

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When is info material?

If ommiting it or misstating it could influence decisions that users make on the basis of reported financial info.

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Why does a company determine whether information is material?

Bc both the nature and or magnitude of the items to which the info relates must be considered in context of individual company's financial report

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When is info immaterial?

If it would to have no impact on a decision maker.

IRRELEVANT

IT MIST MAKE A DIFFERENCE ROR A COMPANY NEED TO NOT REPORT IT.

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Why is materiality one of the most challenging aspects of accounting?

It requires evaluating both relative size and importance of each item.

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When determining a item is material what must be considered?

Qualitative and quantitative factors

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What are the enhancing qualities of relevance

Comparability
Verifiability

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Comparability

Enables users to identify real similarities and differences in economic events between companies.

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Info that is measured and reported in a similar manner for diff companies is considered what?

Comparable

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What is another type of comparability?

Consistency,

Which is present when a company applies the same accounting treatment to similar events from period to period.

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Variability

Occurs when independent measures using the same methods obtain similar results

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Variability occurs in 2 situations

Direct verification
-- verification of an amount for an asset therefore can occur by simply counting inventory.

Indirect verification
-- verification may occur by checking inputs (quantity and costs) and recalculating the outputs (EI value) using the same accounting convention or methodology

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What are the two enhancing qualities for faithful representation?

Timeliness
Understandability

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Timeliness

Means having info available to decision makers before it loses its capacity to influence decisions.

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If there is a lack of timeliness

Then it can rob info of its usefulness.

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Understandability

Quality of info that lets reasonably informed users see it's significance.

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When is understability enhanced?

When it is classified , characterized and presented clearly and concisely.

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FASB classified elements into 2 distinct groups

Assets, liabilities and equity is

The other 7 elements describe what

A, L, E = Describing amounts of resources and claims to resources at a moment in time.



Other 7 = Transactions events and circumstances that affect a company during a period of time .

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Assets

Probably future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

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Liabilities s

Probable future sacrifices of economic benefits arising from present obligations of s particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

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Equity

Residual interest in assets of an entity that remains after deducting its liabilities.

In business enterprise the equity is the ownership interest.

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Investments by owner s

Increases in net assets of a particular enterprise resulting transfers to it from other entities of something of value to obtain or increase ownership interest or equity in it.

Assets are more commonly received as investments by lenders but that which is recorded may also include devices or satisfaction or conversion of liabilities of enterprise.

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Comprehensive income

Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources.
J
It includes all changes in equity during a period except those resulting from investment shy owners and distributions to owners.

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Revenues

Inflows or enhancements of assets of an entity or settlement of its liabilities (or combo of both) during period from delivering or producing goods rendering services or other scitivities that constitutive the equity ongoing major or central operations

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Expenses

Outflows or the using up of assets or incurrence of liabilities (or combo of both) during period from delivering or producing goods rendering services or carrying out other acitivites that constitute the entity's ongoing major or central operations

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Gains

Increase in equity (net assets) from transactions

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Losses

Decrease in equity (net assets) from transactions

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What is the 3rd level of framework?

Concepts that implant the basic objective of level 1.

Recognition and measurement concept

I

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What do the concepts explain

How companies should recognize measure and report financial elements and events.

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What are the 4 basic assumptions that underlie the financial accounting structure

Economic entity
Going concern
Monetary unit
Periodicity

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Economic entity

Means that economic activity can be identified with a particular unit of accountability .

Company keeps activity separate and distinct from its owners and any other business unit.

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Going concern

Assumption that the company will have a long life.

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Under liquidation approach

Company would better state asset values at net realizable value than at acquisition cost.

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The going concern applies in most business when only

Where liquidation appears imminent is the assumption inapplicable

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Monetary unit

Means that money is the common denominator of economic activity and provides appropriate basis for accounting measurement and analysis.

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The monetary unit is

Relevance simply understandable and useful.

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In US, accounting ignore price level changes and assumes the unit of measure the dollar to remain as what?

Reasonably Stable

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Periodicity

Implies that a company can divide its economic activities into artificial time periods.

The time periods vary from monthly quarterly and yearly.

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It is more difficult to determine proper net income when?

The time period is shorter

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4 basic principles of accounting

Measurement
Revenue
Expense
Full disclosure

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Most commonly used measurements are based on what?

Historical cost
Fair value

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Historical cost

Is where GAAP requires that companies account for and report many assets and liabilities on the basis of acquisition price

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Historical cost is generally thought to be what?

Verifiable

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Fair value

Is defined as the price that would be received to sell an asset or paid to tender a liability in an orderly transaction between market participants at measurement date.

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Fair value is what type of measure

Market based measure

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Fair value principle

Is where GAAP has called for use of fair value measurements in financial statements

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Fair value measures or estimates often provide more relevant information about?

Expected future cash flows related to asset or liability.

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What is used as the basis for measurement of financial assets and liabilities?

Fair value option

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Revenue recognition

Requires company recognize revenue in accounting period in which the performance obligation is satisfied

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What is performance obligation

When a company agrees to perform a service or sell a product to a customer

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Expense recognition

Let the expenses follow the revenues

Matching expenses (efforts) with revenues (accomplishments)

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Two types of costa and what are they?

Product: such as material, labor and overhead attached to product


Period: such as officers salaries and other administrative expenses attach to period

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Full disclosure

It recognizes the nature and amount of info included in fisncnsil reports reflects a series of judgements trade offs

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Trade offs strive for

1. Sufficient detail to disclose matters that make a difference to users

2. Sufficient condensation to make info understandable keep in mind costs of preparing and using it.

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Where do users find info about financial position, cash flows and investments?

Within main body of financial statements

In the notes to those statements

As supplementary information

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Notes to financial statements

Amply or explain the items presented in main body of statements

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Supplementary info

May include details or amounts that present a different perspective from that adopted in financial statements

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Cost constraint

In providing info with qualitative characteristics that make it useful companies must consider the overriding fact that limits reporting

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What is the difficulty in cost benefit analysis?

The costs especially benefits are not always evident or measurable.

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He costs are several kinds

Costs of collecting and processing
Of disseminating
Of auditing
Of potential litigation
Of disclosure to competitors
Of analysis and interpretation