Defintions Flashcards
(26 cards)
Relevance
fundamental quality: Accounting data capable of making a difference in a decision is reported
Faithful representation
fundamental quality: JE/numbers reflect what truly existed or happened
Predictive value
ingredient to relevance: helps users form own expectations about future
Confirmatory value
ingredient to relevance: helps users confirm or correct prior expectations
materiality
ingredient to relevance: Information is material if omitting it or misstating it would influence decisions that users make on the basis of the reported financial information.
Completeness
ingredient to faithful rep.: all the information that is necessary for faithful representation is provided
Neutrality
ingredient to faithful rep.: company cannot select information to favor one set of interested parties over another.
Free from error
ingredient to faithful rep.: An information item that is free from error will be a more accurate (faithful) representation of a financial item.
Comparability
relevance enhancing quality: a company consistently uses same accounting principles as in prior years
Verifiability:
relevance enhancing quality: occurs when independent measurers, using the same methods, obtain similar results
Timeliness
faithful representation enhancing quality: having information available to decision-makers before it loses its capacity to influence decisions. Having relevant information available sooner can enhance its capacity to influence decisions
Understandability:
faithful representation enhancing quality: the quality of information that lets reasonably informed users see its significance. Understandability is enhanced when information is classified, characterized, and presented clearly and concisely.
Economic Entity Assumption
means that economic activity can be identified with a particular unit of accountability; business is separate from owner and other parties
ex/ transactions of only the business are reported in financial statements
Going Concern Assumption
assume company will have long life
ex/ depreciation policies correctly assume the company will have a long life
Monetary Assumption
means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
ex/ transactions need to be expressed in dollars
Periodicity Assumption
a company can divide its economic activities into artificial time periods.
ex/ companies may produce monthly financial reports
Measurement Principle
transactions need to be described as numbers with a certain degree of certainty before they can be journalized
historical cost or fair value
Revenue recognition Principle
Revenue is recognized as performance obligations are satisfied (accrual basis)
Expense recognition Principle
expenses match with revenues in the period they are satisfied (accrual)
ex/ accruing salaries earned by employees even though they have not yet been paid
Full disclosure Principle
recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade-offs
ex/ footnotes, sufficient details
Cost constraint
companies must weigh the costs of providing the information against the benefits that can be derived from using it.
companies don’t want to disclose too much info cause other companies will steal it
ex/ Research and development expense
Primary objective of financial reporting is
provide financial info that is useful to present and potential to investors, lendors, and creditors in making decisions
underlying theme of conceptual framework is
usefulness for decision making
a general journal…
chronologically lists transactions and other events, expressed in terms debits and credits
