Chapter 7 - Conceptual framework Flashcards by Sam Chamberlain

What is the purpose of the conceptual framework for financial reporting

Assist International accounting standards board to develop IFRS standards
Assist preparers to develop consistent accounting policies
Assist all parties in understanding/applying IFRS

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How many chapters are there in the framework?

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What is in chapter 1?

Objective of financial reporting is to provide financial info to users

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What is in chapter 2?

For info to be useful it must contain the fundamental qualitative characteristics

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What are the fundamental qualitative characteristics?

Relevance
Materiality
Faithful representation
Completeness
Neutrality
Error free

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What are enhancing qualitative characteristics?

-Comparability
- Verifiability
- Timeliness
- Understandability

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What is in chapter 3?

Objective of financial statements is to provide info about assets, liabilities, equity, income and expenses

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What is the going concern assumption?

Reporting entity will continue in operation for the foreseeable future

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What is in chapter 4?

The elements of financial statements

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What are the different elements of financial statements?

Assets
Liabilities
Equity
Income
Expenses

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How is an asset defined?

A present economic resource controlled by the entity as a result of past events

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How is a liability defined?

A present obligation of the entity to transfer an economic resource as a result of past events

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How is an equity defined?

The residual interest in the assets of the entity after deducting all its liabilities

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How is income defined?

Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims

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How are expenses defined?

Decreases in assets or increases in liabilities that result in decreases in equity other than those relating to distributions to holders of equity claims

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What is an economic resource?

A right that has potential to produce economic benefits

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What is in chapter 5?

Recognition criteria

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What is the criteria for items to be recognised in statements?

Meet definitions of one of the elements of statements
Provide relevant info
Provide faithful representation

What is deregognition?

Removal of all/part of a recognised asset/liability from SOFP

What is in chapter 6?

Recognised items need to be quantified in monetary terms

How can items be measured for monetary value?

Historical cost
Current value

What is historical cost?

Provide monetary info derived from the price of the transaction at the date it occurred

Doesn’t reflect changes in value

What is current value?

Uses up to date info at the measurement date to provide monetary info

What bases are used in current value measurements?

Fair value
Value in use
Current cost

What is fair value?

Price that would be received to sell an asset in an orderly transaction between market participants at the measurement date

What is value in use?

Value in use is the present value of the cash flows or other economic benefits which an entity expects to derive from use of asset and from its ultimate disposal

What is fulfilment value?

Present value of the cash that an entity expects to be obliged to transfer to fulfil a liability

What is current cost of an asset?

Cost to acquire an equivalent asset at the measurement date plus transaction costs incurred

What is the current cost of a liability?

The consideration that would be received for an equivalent liability at the measurement date minus transaction costs incurred

What are the advantages of historical cost accounting?

- Easy to understand - Straightforward to produce - Objective and bias free - Reliable - Gains not recorded until realised

What are the disadvantages of historical cost accounting?

- Carrying amounts of non-current assets often substantially below current value - Inventory values outdated - P/L doesn't reflect current value - Price changes unaccounted for - Profits overstated and assets understated

What is in chapter 7?

Presentation and disclosure within financial statements

What is the objective of presentation and disclosure?

To add to the fundamental and enhance qualitative characteristics of info Understandability and, relevance and comparability improved

What is classification?

Sorting of assets, liabilities, equity, income, and expenses on the basis of shared characteristics for presentation and disclosure purposes

What is aggregation?

Makes info more useful by summarising a large volume of detail

What is in chapter 8?

Concepts of capital and capital maintenance

What are the 2 concepts of capital?

Financial and physical

What is the financial concept of capital?

Capital=net assets or equity of an entity Used by most entities

What is the physical concept of capital?

Capital=productive capacity of entity (measured using units of output per day)

What is capital maintenance?

Preserving the value of the capital of the entity and reporting profit only if the capital of the entity has increased

What are the 2 types of capital maintenance?

PCM and FCM?

What is PCM?

Physical capital maintenance Sets aside profits in favour of operational activity

What is FCM?

Financial capital maintenance Sets aside profit to preserve the value of shareholder's funds in real terms