W3 Flashcards
Lecture 1
What’s the conceptual framework?
A principles-based accounting system allowing for flexibility.
There needs to be specific criteria that will be consistent from company to company
IFRS sets the criteria for principles-based accounting methods
Name one purpose for the conceptual framework.
- Helps IASB to develop standards that are based on consistent concepts
- Helps preparers to understand standards and develop consistent accounting policies
- Helps users to understand and interpret financial statements
What’s the objective of financial statements?
Provide Useful Information About:
- SFP
- SCI
- effect of non-financial performance events - SCIE
- SCF
Users must be able to assess management’s stewardship and prospects for future net cash inflows to the entity.
What’s the Going Concern?
A business will continue for the foreseeable future.
What’re qualitative characteristics?
Characteristics that make information useful.
What’s the first type of qualitative characteristic?
Fundamental
- Relevance
- Faithful representation
What’s the 2nd type of qualitative characteristic?
Enhancing qualitative characteristics
- Comparability
- Verifiability
- Timeliness
- Understandability
What is relevance in regards to fundamental characteristics?
Information is relevant if it has the ability to influence economic decisions of users, and is provided in time to influence those decisions.
If you cannot make decisions based on the information – not relevant and not useful.
When is info relevant?
in terms of the value
If it has a predictive or confirmative value
What does a predictive value mean?
When it helps users to predict future outcomes.
What does a confirmatory value mean?
When it provides feedback which helps to confirm or refute previous predictions.
What’s one way that relevance is affected?
Materiality.
Materiality is an accounting principle which states that all items that are reasonably likely to impact investors’ decision-making must be recorded or reported in detail in a business’s financial statements using GAAP standards.
When is information material?
When it’s omission (removal) or misstatement could influence the economic decisions of the user.
Also, relates specifically to the company.
What’s faithful representation in regards to fundamental charcteristics?
Transactions and events must be accounted for and presented in their economic reality and not their legal form.
What 3 things must be followed when it comes to faithful representation?
- Completeness - within materiality bounds
- Neutrality - objective + bias-free + supported by prudence
- Free from errors
What’s comparability in regards to fundamental characteristics?
Users must be able to compare financial statements over a period of time in order to identify trends in financial position and performance.
Also, compare similar companies.
What’s verifiability?
Independent observers reach the same conclusion.
Confirmed by an audit.
What’s timeliness?
Produced in time to make decisions.
Usually 2-3 months for financial statements to be made.
What’s understandability?
Info must be readily understandable by users.
Information that may be relevant to decision making should not be excluded on the grounds that it may be too difficult for certain users to understand.
Assume users have basic business and economic knowledge.
What’s the Reporting Entity?
An entity that is required, or chooses, to prepare financial statements not necessarily a legal entity—could be a portion of an entity or comprise more than one entity.
When more than one entity, consolidated/group financial statements are prepared.
What’re financial statements?
A particular form of financial reports that provide information about the reporting entity’s assets, liabilities, equity, income and expenses.
What’s an Asset?
A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
What’s a liability?
accounting definition
A present obligation of the entity to transfer an economic resource as a result of past events.
An obligation is a duty or responsibility that the entity has no practical ability to avoid.
What’s Equity?
Assets less liabilities – the residual interest in the assets after deducting all its liabilities.
