acis 3115 ch. 2

acis 3115 ch. 2 - Conceptual Framework Underlying Financial...

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Unformatted text preview: Conceptual Framework Underlying Financial Accounting Underlying Chapter Chapter 2 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Chapter 2 -1 Pre d by C Harm Unive pare oby on, rsity of C alifornia, S anta Barbara Chapter 2 Learning Objectives 1. 2. 3. 4. 5. 6. 7. 8. De scribetheuse fulne of a conce ss ptual fram work. e De scribetheFAS e B’s fforts to construct a conce ptual fram work. e Unde rstand theobje s of financial re ctive porting. I de ntify thequalitativecharacte ristics of accounting inform ation. De thebasic e m nts of financial state e fine le e m nts. De scribethebasic assum ptions of accounting. Explain theapplication of thebasic principle of accounting. s De scribetheim pact that constraints haveon re porting accounting De inform ation. inform Chapter 2 -2 Conceptual Framework Conceptual Conceptual Framework Framework Need Development First Level: First Basic Objectives Objectives Second Level: Second Fundamental Concepts Concepts Qualitative Qualitative characteristics characteristics Basic elements Third Level: Third Recognition and Measurement Measurement Basic Basic assumptions assumptions Basic principles Constraints Chapter 2 -3 Conceptual Framework The Need for a Conceptual Framework To de lop a cohe nt se of standards and rule ve re t s To solvene and e e w m rging practical proble s m Chapter 2 -4 LO 1 Describe the usefulness of a conceptual framework. Development of Conceptual Framework TheFAS has issue six Statements of Financial B d Accounting Concepts (S FAC for busine e rprise ) ss nte s. SFAC No.1 - Obje s of Financial Re ctive porting SFAC No.2 - QualitativeC haracte ristics of Accounting I nform ation SFAC No.3 - Ele e of Financial S m nts (supe de by m nts tate e rce d SFAC No.4 - Nonbusine Organizations ss SFAC No.5 - Re cognition and Me asure e in Financial S m nts m nt tate e SFAC No.6 - Ele e of Financial S m nts (re m nts tate e place S s FACNo. 3) SFAC No.7 - Using C Flow I nform ash ation and Pre nt Valuein Accounting se Me asure e m nts Chapter 2 -5 S FACNo. 6) LO 2 Describe the FASB’s efforts to construct a conceptualObjective 2 framework. Conceptual Framework The Framework is comprised of three levels: First Level = Basic Obje s ctive Second Level = QualitativeC haracte ristics and Basic Ele e m nts Third Level = Re cognition and Me asure e C pts. m nt once Chapter 2 -6 LO 2 Describe the FASB’s efforts to construct a conceptual framework. ASSUMPTIONS 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity PRINCIPLES 1. Historical cost 2. Revenue recognition 3. Matching 4. Full disclosure CONSTRAINTS 1. Cost-benefit 2. Materiality 3. Industry practice 4. Conservatism Third level QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS Relevance Reliability Comparability Consistency ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second level Illustration 2-6 C ptual once Fram work for e Financial Re porting 1. 1. 2. 2. 3. 3. Chapter 2 -7 OBJECTIVES Useful in investment and credit decisions and Useful in assessing future cash flows future About enterprise resources, claims to resources, and changes in them changes First level LO 2 Describe the FASB’s LO efforts to construct a conceptual framework. conceptual Conceptual Framework Review: What aretheS m nts of Financial Accounting C pts inte d to tate e once nde What e stablish? a. Ge rally acce d accounting principle in financial re ne pte s porting by Ge busine e rprise ss s. busine nte Them aning of “Pre nt fairly in accordancewith ge rally se ne The e acce d accounting principle pte s.” acce Theobje s and conce for usein de loping standards of pts ve The ctive financial accounting and re porting. f inancial Thehie s ne pte The rarchy of source of ge rally acce d accounting principle s. principle (C adapte PA d) b. c. d. (C adapte PA d) Chapter 2 -8 LO 2 Describe the FASB’s efforts to construct a conceptual framework. First Level: Basic Objectives First Financial re ation that: Financial porting should provideinform (a) is use to pre nt and pote ful se ntial inve stors and cre ditors and othe use in r rs m aking rational inve e cre and sim de stm nt, dit, ilar cisions. (b) he pre nt and pote lps se ntial inve stors and cre ditors and othe use in asse r rs ssing t heam ounts, tim and unce ing, rtainty of prospe ctivecash re ipts. ce (c) portrays thee conom re ic source of an e rprise theclaim to thosere s nte , s source s, and thee cts of transactions, e nts, and circum ffe ve stance that changeits s re source and claim to thosere s s source s. Chapter 2 -9 LO 3 Understand the objectives of financial reporting. Conceptual Framework Review: According to theFAS conce B ptual fram work, theobje s of e ctive According financial re ss nte s d f inancial porting for busine e rprise arebase on? a. b. c. d. Ge rally acce d accounting principle ne pte s Re porting on m anage e ste m nt’s wardship. Thene d for conse e rvatism . Thene ds of theuse of theinform e rs ation. (C adapte PA d) Chapter 2-10 LO 3 Understand the objectives of financial reporting. Second Level: Fundamental Concepts Second Question: How doe a com s pany choosean acce ptableaccounting m thod, the e am ount and type of inform s ation to disclose and theform in which to , at pre nt it? se Answer: Chapter 2-11 LO 4 Identify the qualitative characteristics of accounting information. Second Level: Fundamental Concepts Qualitative Characteristics “TheFAS ide B ntifie theQualitative Characteristics of d accounting inform ation that distinguish be r (m use inform tte ore ful) ation f rominfe (le use inform rior ss ful) ation for de cision-m aking purpose s.” Chapter 2-12 LO 4 Identify the qualitative characteristics of accounting information. Second Level: Qualitative Characteristics Illustration 2-2 Hie rarchy of Accounting Qualitie s Chapter 2-13 LO 4 Identify the qualitative characteristics of accounting information. Second Level: Fundamental Concepts Understandability A com pany m pre nt highly re vant and re ay se le liableinform ation, howe r it was use ss to thosewho do not unde ve le rstand it. Chapter 2-14 LO 4 Identify the qualitative characteristics of accounting information. ASSUMPTIONS 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity PRINCIPLES 1. Historical cost 2. Revenue recognition 4. Full disclosure CONSTRAINTS 1. Cost-benefit 2. Materiality 4. Conservatism 3. Matching 3. Industry Relevance and Reliabilitypractice Third level QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS Relevance Reliability Comparability Consistency ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second level Illustration 2-6 C ptual once Fram work for e Financial Re porting 1. 1. 2. 2. 3. 3. Chapter 2-15 OBJECTIVES Useful in investment and credit decisions and Useful in assessing future cash flows future About enterprise resources, claims to resources, and changes in them changes First level LO 4 Identify the qualitative LO characteristics of accounting information. accounting Second Level: Qualitative Characteristics Primary Qualities: Relevance – making a differe in a de nce cision. Pre dictivevalue Fe dback value e Tim line e ss Reliability Ve rifiable Re se pre ntational faithfulne ss Ne utral - fre of e and bias e rror Chapter 2-16 LO 4 Identify the qualitative characteristics of accounting information. Second Level: Qualitative Characteristics Review (True or False): Re vanceand re le liability arethetwo prim qualitie that m ary s ake Re accounting inform ation use for de ful cision m aking. accounting To bere liable accounting inform , ation m becapableof m ust aking To a diffe ncein a de re cision. diffe Chapter 2-17 LO 4 Identify the qualitative characteristics of accounting information. ASSUMPTIONS 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity PRINCIPLES 1. Historical cost 2. Revenue recognition 4. Full disclosure CONSTRAINTS 1. Cost-benefit 2. Materiality 4. Conservatism 3. Matching 3. Industry practice Comparability and Consistency Third level QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS Relevance Reliability Comparability Consistency ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second level Illustration 2-6 C ptual once Fram work for e Financial Re porting 1. 1. 2. 2. 3. 3. Chapter 2-18 OBJECTIVES Useful in investment and credit decisions and Useful in assessing future cash flows future About enterprise resources, claims to resources, and changes in them changes First level LO 4 Identify the qualitative LO characteristics of accounting information. accounting Second Level: Qualitative Characteristics Secondary Qualities: Comparability – I nformation that is me d and re d in a asure porte sim m r for diffe nt com ilar anne re panie is conside d com s re parable . Consistency - Whe a company applies thesameaccounting n t re e to sim e nts frompe to pe atm nt ilar ve riod riod. Chapter 2-19 LO 4 Identify the qualitative characteristics of accounting information. ASSUMPTIONS 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity PRINCIPLES 1. Historical cost 2. Revenue recognition 3. Matching CONSTRAINTS 1. Cost-benefit 2. Materiality 3. Industry practice 4. Conservatism Elements Third level 4. Full disclosure QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS Relevance Reliability Comparability Consistency ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second level Illustration 2-6 C ptual once Fram work for e Financial Re porting 1. 1. 2. 2. 3. 3. Chapter 2-20 OBJECTIVES Useful in investment and credit decisions and Useful in assessing future cash flows future About enterprise resources, claims to resources, and changes in them changes First level LO 5 Define the basic elements LO of financial statements. of Second Level: Elements Concepts Statement No. 6 de s te inte late e m nts that fine n rre d le e re to m asuring thepe late e rform anceand financial status of a busine ss e rprise nte . “Moment in Time” Asse ts Liabilitie s Equity “Period of Time” I nve e by owne stm nt rs Distribution to owne rs C pre nsiveincom om he e Re nue ve Expe s nse Gains Losse s LO 5 Define the basic elements of financial statements. Chapter 2-21 Second Level: Elements Exercise 2-3 I de ntify thee m nt or e m nts associate with ite s be le e le e d m low. Elements (a) Arise frompe s riphe or incide ral ntal (a) transactions. t ransactions. (b) Obligation to transfe re r source arising s (b) froma past transaction. f rom (c) I ncre s owne ase rship inte st. re (d) De s and pays cash divide to nds (d) clare owne rs. owne (e I ncre s in ne asse in a pe from ) ase t ts riod (e nonowne source r s. nonowne Asse ts Liabilitie s Equity Equity I nve e by owne stm nt rs Distribution to owne rs C pre nsiveincom om he e Re nue ve Expe s nse Gains Gains Chapter 2-22 Losse s Losse LO 5 Define the basic elements of financial statements. Second Level: Elements Exercise 2-3 I de ntify thee m nt or e m nts associate with ite s be le e le e d m low. Elements (f) I te s characte d by future m rize e conom be fit. ic ne (g) Equals incre in ne asse during ase t ts Equals t heye afte adding distributions ar, r t o owne and subtracting rs inve e by owne stm rs. inve nts (h) Arise fromincom state e s e m nt Arise activitie that constitutethe s e ntity’s ongoing m or ce ajor ntral ope rations. ope Chapter 2-23 Asse ts Liabilitie s Equity Equity I nve e by owne stm nt rs Distribution to owne rs C pre nsiveincom om he e Re nue ve Expe s nse Gains Gains Losse s Losse LO 5 Define the basic elements of financial statements. Second Level: Elements Exercise 2-3 I de ntify thee m nt or e m nts associate with ite s be le e le e d m low. Elements (i) Re sidual inte st in thene asse of re t ts (i) thee rprise . t he nte (j) I ncre s asse through saleof ase ts (j) product. product. (k) De ase asse by purchasing the cre s ts (k) com pany’s own stock. com (l) C s quity during thepe riod, (l) hange in e e pt thosefrominve e by xce stm nts owne and distributions to owne rs rs. owne Asse ts Liabilitie s Equity Equity I nve e by owne stm nt rs Distribution to owne rs C pre nsiveincom om he e Re nue ve Expe s nse Gains Gains Chapter 2-24 Losse s Losse LO 5 Define the basic elements of financial statements. Second Level: Elements Review: According to theFAS conce B ptual fram work, an e e ntity’s re nuem ve ay According re from sult re a. b. c. d. A de asein an asse fromprim ope cre t ary rations. An incre in an asse fromincide transactions. ase t ntal An incre in a liability fromincide transactions. ase ntal A de asein a liability fromprim ope cre ary rations. (C adapte PA d) Chapter 2-25 LO 5 Define the basic elements of financial statements. Third Level: Recognition and Measurement TheFAS se forth m of the conce in its Statement of B ts ost se pts Financial Accounting Concepts No. 5, “Re cognition and Me asure e in Financial S m nts of Busine Ente m nt tate e ss rprise s.” ASSUMPTIONS 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity PRINCIPLES 1. Historical cost 2. Revenue recognition 3. Matching 4. Full disclosure CONSTRAINTS 1. Cost-benefit 2. Materiality 3. Industry practice 4. Conservatism Chapter 2-26 LO 6 Describe the basic assumptions of accounting. Third Level: Assumptions Economic Entity – company ke ps its activity separatefromits e owne and othe busine s. rs r sse Going Concern - company to last long enough to fulfill obje s ctive and com itm nts. me Monetary Unit - money is thecommon denominator. Periodicity - company can divideits economic activitie into time s pe riods. Chapter 2-27 LO 6 Describe the basic assumptions of accounting. Third Level: Assumptions Brief Exercise 2-4 I de ntify which basic assum ption of accounting is be st de scribe in e ite be d ach m low. (a) Thee conom activitie of Fe Corporation aredivide ic s dEx d into 12-m onth pe riods for thepurposeof issuing annual re ports. (b) S ctron Corporation, I nc. doe not adjust am ole s ounts in its f inancial state e for thee cts of inflation. m nts ffe (c) Walgre n Co. re e ports curre and noncurre classifications nt nt in its balanceshe t. e (d) Thee conom activitie of Ge ral Ele ic s ne ctric and its subsidiarie arem rge for accounting and re s ed porting purpose s. Chapter 2-28 LO 6 Describe the basic assumptions of accounting. Third Level: Principles Historical Cost – t heprice e , stablishe by thee d xchangetransaction, is the“cost”. I ssue s: Historical cost provide a re s liablebe nchm for m asuring historical ark e t re nds. Fair valueinform ation m bem use ay ore ful. FAS issue S B d FAS15X, “Fair ValueMe asure e (2005).” m nts Re porting of fair valueinform ation is incre asing. Chapter 2-29 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Revenue Recognition - gene occurs (1) when re d or rally alize re alizableand (2) whe e d. n arne Exce ptions: During Production. At End of Production Upon Re ipt of C ce ash Chapter 2-30 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Third Matching - efforts (expenses) should bematche with d accom plishm nt (re nue whe ve it is re e ve s) ne r asonableand practicableto do so. “Le thee nsefollow there nue t xpe ve s.” Illustration 2-4 Recognition Expense Chapter 2-31 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Full Disclosure – providing information that is of sufficient im portanceto influe thejudgm nt and de nce e cisions of an inform d use e r. Provide through: d Financial S m nts tate e Note to theFinancial S m nts s tate e S upple e m ntary inform ation Chapter 2-32 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Brief Exercise 2-5 I de ntify which basic principleof accounting is be de st scribe in e ite be d ach m low. (a) Norfolk S outhe C rn orporation re ports re nuein its incom ve e state e whe it is e d inste of whe thecash is colle d. m nt n arne ad n cte (b) Yahoo, I nc. re cognize de ciation e nsefor a m s pre xpe achineove the r 2-ye pe during which that m ar riod achinehe thecom lps pany e arn re nue ve . (c) OracleC orporation re ports inform ation about pe nding lawsuits in t henote to its financial state e s m nts. (d) Eastm Kodak Com an pany re ports land on its balanceshe t at the e am ount paid to acquireit, e n though thee ate fair m t ve stim d arke valueis gre r. ate Chapter 2-33 LO 7 Explain the application of the basic principles of accounting. Third Level: Constraints Third Cost Benefit – t hecost of providing theinformation must be we d against thebe fits that can bede d fromusing it. ighe ne rive Materiality - an itemis material if its inclusion or omission would influe or changethejudgm nt of a re nce e asonablepe rson. Industry Practice - t hepeculiar natureof someindustries and busine conce som tim s re ss rns e e quire de s parturefrombasic accounting t he ory. Conservatism – when in doubt, choosethesolution that will be le like to ove ast ly rstateasse and incom . ts e Chapter 2-34 LO 8 Describe the impact that constraints have on LO reporting accounting information. reporting Third Level: Constraints Brief Exercise 2-6 What accounting constraints areillustrate by d t heite s be m low? (a) Zip’s Farm I nc. re s, ports agricultural crops on its balance she t at m t value e arke . (b) C son TideC rim orporation doe not accruea continge s nt lawsuit gain of $650,000. (c) Wildcat C pany doe not discloseany inform om s ation in the note to thefinancial state e unle thevalueof the s m nts ss inform ation to use e e thee nseof gathe it. rs xce ds xpe ring (d) S De C un vil orporation e nse thecost of waste xpe s baske in ts t heye the areacquire ar y d. Chapter 2-35 LO 8 Describe the impact that constraints have on LO reporting accounting information. reporting IFRS Unit 2 IASB IASB Framework for the Preparation and Presentation of Financial Statements Presentation Issued by IASC in 1989 Adopted by IASB in 1991 Framework Objectives addresses of financial statements Qualitative characteristics Concepts of capital and capital maintenance Elements of financial statements Chapter 2-36 IFRS Unit 2 Differences Concepts GAAP between IASB and FASB frameworks of capital and capital maintenance relies primarily on historical cost IFRS lists several options (historical cost, current cost, IFRS realizable value, present value) with no guidance on selection realizable Some minor differences in details of definitions IASB focuses on understandability, relevance, IASB reliability and comparability, but not consistency reliability IASB IASB and FASB are working toward a single conceptual framework conceptual Chapter 2-37 Wrap Up Remember, Remember, we have our first exam on Monday! Monday! Questions? Chapter 2-38 ...
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This note was uploaded on 02/21/2009 for the course ACIS 3115 taught by Professor Cmeasterwood during the Spring '08 term at Virginia Tech.

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