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CHAPTER
Learning Objectives
1. 2. 3. 4. 5. 6. 7. Describe the usefulness of a conceptual framework. Describe the FASBs efforts to construct a conceptual framework. Understand the objectives of financial reporting. Identify the qualitative characteristics of accounting information. Define the basic elements of financial statements. Describe the basic assumptions of accounting. Explain the application of the basic principles of accounting. Describe the impact that constraints have on reporting accounting information.
8.
Chapter 2-3
Conceptual Framework
Need Development
Chapter 2-4
Conceptual Framework
The Need for a Conceptual Framework
To develop a coherent set of standards and rules To solve new and emerging practical problems
Chapter 2-5
Conceptual Framework
Review:
A conceptual framework underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements.
True
Chapter 2-6
Conceptual Framework
Review:
A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary.
False
Chapter 2-7
SFAC No.7 - Using Cash Flow Information and Present Value in Accounting Measurements
Chapter 2-8
Conceptual Framework
The Framework is comprised of three levels:
First Level = Basic Objectives Second Level = Qualitative Characteristics and Basic Elements Third Level = Recognition and Measurement Concepts.
The FASB and the IASB have agreed on a joint project to develop a common and improved conceptual framework.
Chapter 2-9
Third level
QUALITATIVE CHARACTERISTICS Relevance Reliability Comparability Illustration 2-7 Conceptual Framework for Financial Reporting Consistency
ELEMENTS
Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses
Second level
OBJECTIVES 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them
First level
Chapter 2-10
Conceptual Framework
Review:
What are the Statements of Financial Accounting Concepts intended to establish? a. Generally accepted accounting principles in financial reporting by business enterprises.
b. The meaning of Present fairly in accordance with generally accepted accounting principles.
c. The objectives and concepts for use in developing standards of financial accounting and reporting. d. The hierarchy of sources of generally accepted accounting principles.
(CPA adapted)
Chapter 2-11
Review:
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on?
LO 3
Answer:
By determining which alternative provides the most useful information for decision-making purposes (decision usefulness).
Chapter 2-14
Chapter 2-15
Chapter 2-16
Chapter 2-17
Third level
Second level
OBJECTIVES 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them
First level
Chapter 2-18
Reliability
Verifiable Representational faithfulness Neutral - free of error and bias
In the proposed converged conceptual framework, reliability will be replaced with faithful representation as one of the primary qualitative characteristics that must be present for information to be useful.
Chapter 2-19
LO 4
Review:
Relevance and reliability are the two primary qualities that make accounting information useful for decision making.
True
To be reliable, accounting information must be capable of making a difference in a decision.
False
Chapter 2-20
Third level
Second level
OBJECTIVES 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them
First level
Chapter 2-21
Chapter 2-22
Review:
Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years before any change in principle is adopted.
False
Chapter 2-23
Third level
QUALITATIVE CHARACTERISTICS Relevance Reliability Comparability Illustration 2-7 Conceptual Framework for Financial Reporting Consistency
Second level
OBJECTIVES 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them
First level
Chapter 2-24
Chapter 2-25
Assets Equity
(b) Liabilities (c) (e) (c) Investment by owners Comprehensive income Revenue Expenses (a) (a) Gains Losses
LO 5
Equity (c) (e) (c) Investment by owners Comprehensive income (d) Distribution to owners (h) Revenue (h) Expenses (a) (a) Gains Losses
LO 5
LO 5
Review:
According to the FASB conceptual framework, an entitys revenue may result from
a. A decrease in an asset from primary operations.
Chapter 2-30
Going Concern - company to last long enough to fulfill Monetary Unit - money is the common denominator. Periodicity - company can divide its economic
activities into time periods.
Chapter 2-31
Periodicity
(b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.
(c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.
Chapter 2-32
Monetary Unit
Going Concern Economic Entity
Chapter 2-34
Chapter 2-35
Chapter 2-36
Revenue Recognition
Expense Recognition
Full Disclosure
Measurement
Materiality - an item is material if its inclusion or Industry Practice - the peculiar nature of some
(a) KC, Inc. reports agricultural crops on its balance sheet at market value.
(b) Rafael Corporation does not accrue a contingent lawsuit gain of $650,000.
Industry Practice
Conservatism
(c) Willis Company does not disclose any information in the notes to the financial statements unless the value of the information to users exceeds the expense of gathering it.
(d) Favre Corporation expenses the cost of wastebaskets in the year they are acquired.
CostBenefit
Materiality
LO 8
Chapter 2-39
The existing conceptual frameworks underlying U.S. GAAP and iGAAP are very similar. The converged framework should be a single document, unlike the two conceptual frameworks that presently exist. The IASB framework makes two assumptions. One assumption is that financial statements are prepared on an accrual basis; the other is that the reporting entity is a going concern. There is some agreement that the role of financial reporting is to assist users in decision making. However, others note that another objective is to provide information on managements performance, often referred to as stewardship.
Chapter 2-40
Copyright
Copyright 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Chapter 2-41