Class Notes - CH 2.pdf - Chapter 2 Investing and Financing...

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12-1Is Accounting in our DNA?Chapter 2Investing and Financing Decisions and the Balance Sheet
Coincidence? The symbols of these four nucleobases can be rearranged to form the initials of the language of business.
22-3CONCEPTUAL FRAMEWORKPart 12-4What is GAAP?
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32-5GAAP’s Conceptual FrameworkGAAP is based on a theoretical framework developed over several centuries.In the U.S., this theoretical framework is called the conceptual framework.The conceptual framework describes …The objectiveof financial reporting to external usersThe characteristicsof useful accounting informationThe underlying assumptionsof U.S. GAAPThe principlesthat guide accounting rulesModifying Concepts(exceptions to the principles)2-6The Conceptual Framework(Page 46)Objective of Financial Reporting to External Users: (Ch. 2)To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.Fundamental Qualitative Characteristics of Useful Information: (Ch. 2)Relevance: Information should have predictive value Faithful Representation:Information must be Complete, Accurate, and UnbiasedEnhancing Qualities: Timeliness, Verifiability, Consistency, and ComparabilityRecognition, Measurement, and Disclosure Concepts:Assumptions: Separate Entity, Going Concern, and Monetary Unit (Ch. 2)Time Period (Ch. 3)Principles: Fair Value PrincipleHistorical Cost Principle (called “Mixed-Attribute Measurement” by Libby) (Ch. 2)Revenue Recognition and Expense Recognition (Ch. 3)Conservatism Principle (CH 7)Substance over Form PrincipleModifying Concepts:Cost-Benefit: Benefits of providing information should outweigh its costs Materiality: Accounting standards can be ignored if the net impact is so small that a reader of the financial statements would not be misled
42-7Conceptual FrameworkObjectives of Financial ReportingOverall objectiveProvide financial information about the reporting entity that is useful to existingandpotentialinvestors, lenders, and other creditors in making investment and credit decisions.

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