FAR 2 - Conceptual Framework of Financial Reporting by Business Enterprises Flashcards Preview

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Flashcards in FAR 2 - Conceptual Framework of Financial Reporting by Business Enterprises Deck (16):

What are the three elements of faithful representation?

Neutrality, completeness and free from material error.

Neutrality means lack of bias-that financial reporting does not have a preconceived objective or agenda.
Completeness means that the info includes all data necessary to be faithfully representative.
Free from error is when there are no omissions of errors.


What are the primary characteristics of relevance?

Predictive value, confirmatory value, and materiality.

Predictive value info assists capital providers in forming expectations about future events.
Confirmatory value info confirms or changes past (or present) expectations based on previous evaluations.
Materiality is info that determines how it will impact a user's decision. Materiality is somewhat pervasive throughout the objectives of financial reporting in the sense that the FS should present material info because it is decision useful.


During the period when an enterprise is under the direction of a particular management, will its FS directly provide information about management performance and/or enterprise performance?

Enterprise performance, but not directly provide information about management performance.

The financial statements provide a wealth of information about the performance and financial position of the enterprise, but they do not directly allow an evaluation of management. There are too many factors that affect the firm's performance to be able to single out management's contribution (or lack of it). Many factors interact to determine the performance of the enterprise, one of them being management's performance. Also, for example, current enterprise performance is affected by the past actions of managers that may no longer be with the enterprise.


According to the conceptual framework, the objectives of financial reporting for business enterprises are based on:
A. The need for conservatism
B. Reporting on management's stewardship
D. The needs of the users

D. User needs define the objectives of FS. FS exist solely to satisfy the information needs of users. One of these information needs might be an evaluation of how well management has carried out its stewardship responsibility to owners for the use of enterprise resources entrusted to it. However, that is just one of many information needs. More important are the information needs concerning the assessments of future performance and cash flow generation. The objectives of financial statements are more involved with forward-looking purposes than with evaluation of the past.


What is the conceptual framework intended to establish?
A. GAAP in financial reporting by business enterprises.
B. The meaning of "present fairly in accordance with GAPP."
C. The objectives and concepts for use in developing standards of financial accounting and reporting.
D. The hierarchy of sources of GAAP

C. The concepts statements, also collectively called The Conceptual Framework, provide the general underpinnings for specific GAAP. In a way, it is a "constitution" for developing specific accounting principles. The concepts statements are not GAAP, however.


T/F: When the reported measure of an economic condition or situation aligns with the economic condition or situation, then it is representationally faithful.


Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Financial information that faithfully represents an economic phenomenon portrays the economic substance of the phenomenon. Information is representationally faithful when it is complete, neutral, and free from material error.


What are the four enhancing qualitative characteristics of the FS?

Comparability, verifiability, timeliness, and understandability.

Comparability enables users to identify similarities and differences between sets of info.
Verifiability - info is verifiable if different knowledgeable and independent observers could reach similar conclusions based on the info.
Timeliness is when info is received in time to make a difference to the decision maker.
Understandability - if the user comprehends it within the decision context at hand. Users are assumed to have a reasonable understanding of business and accounting and are willing to study the info with reasonable diligence.


Reporting inventory at the lower of cost or market is a departure from the accounting principle of:
A. Historical cost.
B. Consistency.
C. Conservatism.
D. Full disclosure

A. 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. This is one of the few such departures.


When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:
A. Reliability.
B. Materiality.
C. Legal entity.
D. Economic entity

D. Consolidated financial statements are an example of trying to account for the economic entity that comprises more than one legal entity, making this the correct response.


T/F: If the going concern assumption were not met, adherence to the historical cost principle would continue to be appropriate.


Only when the going concern assumption is met, then the historical cost principle supports many assets.


T/F: The accounting assumption of separate entity supports the inclusion of prepaid insurance in total assets.


The accounting assumption of separate entity assumes that there is a separate accounting entity for each business organization.


T/F: A firm has income of exactly zero for a year during which both specific and general prices (inflation) have increased. The firm maintained its capital under the financial 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 a firm has income, it has recognized revenue sufficient to replace all the resources used in generating that revenue.


Y/N: Are most assets subsequently adjusted for changes in market value under the historical cost principle?



T/F: Matching is not an accounting assumption.


Matching principle: recognize expenses only when expenditures help to produce revenues. Revenues are recognized when earned and realized or realizable; the related expenses are recognized, and the revenues and expenses are "matched" to determine net income or loss.


According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
A. Consistency.
B. Cost-benefit.
C. Relevance.
D. Representational faithfulness.

B. Cost-benefit is the only constraint among the four answer alternatives. When the cost of information exceeds its benefit, it should not be reported, even if it might be useful.


What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies?
A. Conservatism.
B. Relevance.
C. Consistency.
D. Faithful representation.

A. Gain contingencies are not recognized, but loss contingencies that are probable and estimable are recognized. This is a classic example of conservatism, which suppresses positive information under conditions of uncertainty but requires the reporting of negative information when the negative outcome is likely.

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