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Unformatted text preview: 2 FINANCIAL REPORTING: ITS CONCEPTUAL FRAMEWORK CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 1. Explain the FASB conceptual framework. 2. Understand the relationship among the objectives of financial reporting. 3. Identify the general objective of financial reporting. 4. Describe the three specific objectives of financial reporting. 5. Discuss the types of useful information for investment and credit decision making. 6. Explain the qualities of useful accounting information. 7. Understand the accounting assumptions and principles that influence GAAP. 8. Define the elements of financial statements. 2-1 SYNOPSIS FASB Conceptual Framework 1. The FASB has been charged with developing a conceptual framework of accounting theory and with establishing standards for financial accounting practice. The conceptual framework, which is intended to provide a theoretical foundation for consistent accounting standards, has been essentially completed, with seven Statements of Financial Accounting Concepts issued. 2. The FASB divided the conceptual framework activities into projects: (a) objectives of financial reporting, (b) qualitative characteristics of accounting information, (c) accounting projects (accounting elements, recognition, and measurement), (d) reporting projects (financial statements and financial reporting, income, and cash flow and liquidity). The first two Statements of Financial Accounting Concepts (objectives and qualitative characteristics) are discussed in this chapter. Objectives of Financial Reporting 3. FASB Statement of Financial Accounting Concepts No. 1 deals with the objectives of financial reporting. These objectives relate to general-purpose financial reporting of companies. That is, they are to meet the needs of a variety of external , rather than internal, users. 4. Three broad objectives of financial reporting, which proceed from the more general to the more specific, are identified in the Statement : (a) The general objective is to provide information that is useful to present and potential investors, creditors, and other external users for decision-making. Users are expected to have a reasonable understanding of business and economic activities, and to be willing to study the information carefully. (b) On a more specific level, the derived external user objective is to provide information useful in assessing the amounts, timing, and uncertainty of prospective cash flows to be received by external users. This information is important because individual and institutional decisions about outflows for investing and lending are made based on the potential for...
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- Spring '08