Flashcards in Conceptual Framework of Financial Reporting Deck (15):
Interim financial statements can be described as emphasizing:
Timeliness over faithful representation. The objective is to provide reasonable information in a timely fashion, rather than exact information.
What is the conceptual framework intended to establish?
The objectives and concepts for use in developing standards of financial accounting and reporting.
The objectives of financial reporting for business enterprises are based on:
The needs of the users of the information. Financial statements exist solely to satisfy the information needs of users.
For information to be useful for decision-making:
It must be both relevant and a faithful representation of the economic phenomena that it represents.
Relevance (Primary Characteristic)
A. Predictive Value
B. Confirmatory Value
Faithful representation (primary characteristic)
C. Free from error
Enhancing qualitative characteristics
According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:
Recognition. Recognition is the strongest reporting action that can be taken. When an item is recognized, that means it will appear in the financial statements, perhaps not as an individual line item, but definitely part of one.
Replacement cost is the amount to be paid for an item at the current time. This concept is used in the lower-of-cost-or-market inventory valuation procedure.
Consolidated financial statements are an example of?
Consolidated financial statements are an example of trying to account for the ECONOMIC ENTITY that comprises more than one legal entity.
The matching principle:
The matching principal requires that we recognize and match expenses with the revenues generated.
Reporting inventory at the lower of cost or market is a departure from the accounting principle of:
Historical Cost. LCM departs from historical cost because it provides an ending valuation below cost when market value is below cost. The inventory is actually written down to a value below what was originally paid.
Conservatism suppresses positive information under conditions of uncertainty but requires the reporting of negative information when the negative outcome is likely.
Monetary unit assumption
The monetary unit assumption provides the basis for using the home-country currency as the reporting basis in the financial statements and also tends to imply that the unit of currency is stable (little or no inflation or deflation)