Conceptual Framework of Financial Reporting Flashcards
List the enhancing qualitative characteristics of financial information.
(1) Comparability
(2) Verifiability
(3) Timeliness
(4) Understandability
What is verifiability?
Information is verifiable if different knowledgeable and independent observers can reach similar conclusions.
What does it mean to be free from material error?
Information is free from material error if it is accurate and truthful.
What is Neutrality?
To be neutral, accounting information must be free of bias.
What is completeness?
Information is complete if it includes all data necessary to be faithfully representative.
What are the Ingredients of Relevance?
Predictive value, Confirmatory value.
Who is the target audience of financial statements?
Decision makers; mainly investors, creditors and regulators.
What are the objectives of financial reporting?
To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions.
What is Timeliness?
To be relevant, accounting information must be received in time to make a difference to the decision maker.
What is Comparability?
The quality of information that enables users to identify similarities and differences between sets of information.
What is Understandability?
Information is understandable if the user comprehends it with reasonable effort and diligence.
What are the ingredients of Faithful Representation?
Completeness.
Free from material error.
Neutrality.
What is Confirmatory Value?
To be relevant, accounting information should assist decision makers in confirming past predictions.
What is Predictive Value?
To be relevant, accounting information should assist financial statement users in making predictions about future events.
What are the Primary Qualitative Characteristics of Financial Information?
Relevance
Faithful representation
What does the historical cost accounting principle state?
Assets and liabilities are recorded at historical cost, that is, their cash equivalent amount at time of origination. The value is the market value of the item on the date of acquisition.
What does the matching principle state?
Recognize expenses only when expenditures help to produce revenues.
When does realization occur in the accounting period?
(1) Goods or services have been provided
(2) Collectability of cash is assured
(3) Expenses of providing goods and services can be determined
What is the concept of capital maintenance?
Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels.
When should a company recognize revenues?
Revenues are recognized when they are earned and collectability is reasonably assured.
What is the entity assumption?
We assume there is a separate accounting entity for each business organization.
What does the full disclosure principle state?
Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.
What are revenues?
Revenues are increases in assets or extinguishment of liabilities stemming from delivery of goods or from providing services – the main activities of the firm.
What is the going concern assumption?
In the absence of information to the contrary, a business is assumed to have an identifiable life, that is, it will continue to be a going concern.
