Chapter 2

Question 1

Assumption

Answer 1

One of the parts in the 3rd level of conceptual framework; a concept that the accounting profession assumes as foundational for the financial accounting structure. 4 basic assumptions: (1) economic entity (2) going concern (3) monetary unit and (4) periodicity

Question 2

Comparability

Answer 2

An enhancing qualitative characteristic of accounting info, which describes info that’s measured &; reported in a similar manner for diff companies. Enables users to identify real similarities in economic activities b/w companies.

Question 3

Completeness

Answer 3

A fundamental quality of faithful representation. All info necessary for faithful representation is provided.

Question 4

Conceptual Framework

Answer 4

A coherent system of objectives &; fundamentals established by FASB, which determine the nature, function, &; limits of financial accounting &; which lead to consistent accounting standards.

Question 5

Confirmatory Value

Answer 5

A fundamental quality of relevance. Helps confirm/ correct prior expectations based on previous evaluations of financial reporting info.

Question 6

Conservatism

Answer 6

Convention in accounting that dictates that when in doubt, choose solution that will least likely overstate assets &; income. Conceptual framework indicates prudence/ conservatism is generally in conflict w/ quality of neutrality, b/c being prudent/ conservative can lead to bias in reported financial position &; financial performance.

Question 7

Consistency

Answer 7

Aspect of comparable info, indicates that a company applied same accounting treatment to similar events from period to period. Company can change methods, but must 1st demonstrate that newly adopted method is preferable to old &; then must disclose in financial statements nature &; effect of accounting change.

Question 8

Cost Constraint

Answer 8

Requires costs of providing info be weighed against benefits that can be derived from using it. Constraint applies to informational requirements established by standard-setting bodies &; governmental agencies as well as to companies reporting financial info.

Question 9

Economic Entity Assumption

Answer 9

Assumption that economic activity can be identified w/ a particular unit of accountability, by keeping enterprise’s economic activity separate &; distinct from that of its owners &; any other business unit. Refers to economic, rather than legal, entities.

Question 10

Elements, Basic

Answer 10

Make up any theoretical structure. 10 basic accounting elements: assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, &; losses. Terms constitute language of business &; accounting.

Question 11

Expense Recognition Principle

Answer 11

Recognition of expenses is related to net changes in assets & earning revenues, that is, “let expense follow revenues.

Question 12

Fair Value

Answer 12

Price that would be received to sell an asset/paid to transfer a liability in an orderly transaction b/w market participants @ measurement date.

Question 13

Fair Value Option

Answer 13

Choice allowed by FASB to use fair value in financial statements as basis of measurement for financial assets & liabilities. Item is recorded @ fair value @ each reporting date, &; unrealized holding gains/ losses are reported as part of net income.

Question 14

Fair Value Principle

Answer 14

GAAP-based principle that calls for use of fair value measurements in financial statements.

Question 15

Faithful Representation

Answer 15

Qualitative characteristic of accounting info. Info must be complete, free from error, and neutral.

Question 16

Financial Statements

Answer 16

Structured means of communicating financial info, through balance sheet, income statement, statement of cash flows, and statement of owners’ equity.

Question 17

Free From Error

Answer 17

Accurate info = more representational faithful.

Question 18

Full Disclosure Principle

Answer 18

Accounting principle that dictates in deciding what info to report, companies follow general practice of providing info that’s of sufficient importance to influence judgment &; decisions of informed user. Recognizes nature &; amount of info included in financial reports reflect series of judgmental trade-offs b/w sufficient detail that makes a difference to users, sufficient condensation to make info understandable, &; costs &; benefits of providing the info.

Question 19

General-Purpose Financial Reporting

Answer 19

Format for providing info to decision-makers @ least cost.

Question 20

Going Concern Assumption

Answer 20

Company will continue in operation for foreseeable future. Only in situations in which liquidation appears imminent is assumption inapplicable.

Question 21

Historical Cost Principle

Answer 21

Companies account for &; report most assets &; liabilities on basis of acquisition price. Is free from error &; neutral, contributes to faithful representation.

Question 22

Matching Principle

Answer 22

Efforts (expenses) be matched w/ accomplishment (revenues) whenever reasonable &; practicable to do so. Linking of expense recognition to revenue recognition - “Let expense follow revenues.”

Question 23

Materiality

Answer 23

Company-specific aspect of relevance, an item is material if its inclusion/ omission would influence/ change judgement of a reasonable person; immaterial, &; therefore irrelevant, if has no impact on a decision maker. Point involved is one of relative size &; importance; both quantitative &; qualitative factors should be considered.

Question 24

Monetary Unit Assumption

Answer 24

Money is common denominator of economic activity &; provided appropriate basis for accounting measurement &; analysis.

Question 25

Neutrality

Answer 25

Fundamental quality of faithful representation, neutrality indicates a company can't select info to favor one set of interested parties over another. Unbiased info must be the overriding consideration.

Question 26

Notes to Financial Statements

Answer 26

Set of disclosure in a company's financial statements that further explain items presented in main body of statements. Additional info provided in notes doesn't have to quantifiable, nor need to quality as an accounting element. Notes to financial statements are considered integral part of statements.

Question 27

Objective of Financial Reporting

Answer 27

Goal for financial accounting &; reporting, established by accounting profession, provide info about reporting entity that's useful to present &; potential to equity investors, lenders, &; other creditors in decisions about providing resources to entity.

Question 28

Period Costs

Answer 28

Costs that attach to a specific accounting period.

Question 29

Periodicity (time period) Assumption Time Period

Answer 29

Company can divide its economic activities into artificial time periods, which vary, but most common: monthly, quarterly, &; yearly. `

Question 30

Predictive Value

Answer 30

Characteristic of relevant info, info must help users predict ultimate outcome of past, present, &; future events.

Question 31

Principles of Accounting

Answer 31

Part of 3rd level of conceptual framework, details recognition &; measurement concepts. Accounting profession generally uses 4 basic principles of accounting to record transactions: (1) measurement (2) revenue recognition (3) expense recognition &; (4) full disclosure.

Question 32

Product Costs

Answer 32

Costs that attach to a specific product. Ex: material, labor, &; overhead. Companies carry product costs into future periods if they recognize revenue from product in subsequent periods.

Question 33

Prudence

Answer 33

Convention in accounting that dictates when in doubt, choose solution that will least likely overstate assets &; income. Conceptual framework indicates prudence/ conservatism is generally in conflict w/ quality of neutrality, b/c bring prudent/ conservative can lead to bias in reported financial position &; financial performance.

Question 34

Qualitative Characteristics

Answer 34

2nd level of conceptual framework of accounting; characteristics of accounting info distinguish better (> useful) info from inferior

Question 35

Relevance

Answer 35

Qualitative characteristics of accounting info, describes info capable of making a difference in a decision. Info w/ no bearing on a decision is irrelevant. To be relevant, info needs predictive/ feedback value &; is material.

Question 36

Revenue Recognition Principle

Answer 36

Basic principle of accounting, dictates companies recognize revenue in accounting period in which performance obligation is satisfied. Generally, recognition @ time of sale provides uniform &; reasonable test.

Question 37

Supplementary Info

Answer 37

Info included in notes to financial statements, includes details/ amounts that present a diff perspective from that adopted in financial statements. May be quantifiable info that's high in relevance but low in reliability &; may include management's explanation of financial info &; its discussion of significance of that info.

Question 38

Timeliness

Answer 38

Enhancing qualitative characteristic of accounting info, indicating info should be available to decision-makers before it loses its capacity to influence their decision.

Question 39

Understandability

Answer 39

Enhancing qualitative characteristic of accounting info that lets reasonably informed users see its significance.

Question 40

Verifiability

Answer 40

Enhancing qualitative characteristic of accounting info, indicating that similar results will occur when independent 3rd parties (ex. auditors) measure using the same methods.