PPT2 - ASSUMPTIONS 1. Economic entity 2. Going concern 3....

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Unformatted text preview: 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 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 I l l ustr a ti on 26 Conceptual Fr amewor k for Fi nanci al Repor ti ng 1. 2. 3. Chapter 2-1 OBJECTIVES Useful in investment and credit decisions Useful in assessing future cash flows About enterprise resources, claims to resources, and changes in them First level LO 2 D escr i be the FASB's effor ts to constr uct a conceptua l fr a mewor k. Fi r st Level : Ba si c Objecti ves Fi nanci al r epor ti ng shoul d pr ovi de i nfor mati on that: (a) i s useful to pr esent and potenti al i nvestor s and cr edi tor s and other user s i n maki ng r ati onal i nvestment, cr edi t, and si mi l ar deci si ons. (b) hel ps pr esent and potenti al i nvestor s and cr edi tor s and other user s i n assessi ng the amounts, ti mi ng, and uncer tai nty of pr ospecti ve cash r ecei pts. (c) por tr ays the economi c r esour ces of an enter pr i se, the cl ai ms to those r esour ces, and the effects of tr ansacti ons, events, and ci r cumstances that change i ts r esour ces and cl ai ms to those r esour ces. Chapter 2-2 LO 3 U nder sta nd the objecti ves of fi na nci a l r epor ti ng. Second Level : Qua l i ta ti ve Cha r a cter i sti cs Pr i ma r y Qua l i ti es: Rel eva nce maki ng a di ffer ence i n a deci si on. Pr edi cti ve val ue Feedback val ue Ti mel i ness Rel i a bi l i ty Ver i fi abl e Repr esentati onal fai thful ness Neutr al - fr ee of er r or and bi as Chapter 2-3 LO 4 I denti fy the qua l i ta ti ve cha r a cter i sti cs of a ccounti ng Second Level : Qua l i ta ti ve Cha r a cter i sti cs Seconda r y Qua l i ti es: Compa r a bi l i ty I nfor mati on that i s measur ed and r epor ted i n a si mi l ar manner for di ffer ent compani es i s consi der ed compar abl e. Consi stency - When a company appl i es the same accounti ng tr eatment to si mi l ar events fr om per i od to per i od. Chapter 2-4 LO 4 I denti fy the qua l i ta ti ve cha r a cter i sti cs of a ccounti ng Second Level : El ements Concepts Sta tement N o. 6 defi nes ten i nter r el ated el ements that r el ate to measur i ng the per for mance and fi nanci al status of a busi ness enter pr i se. "M oment i n T i me" Assets L i abi l i ti es Equi ty "Per i od of T i me" I nvestment by owner s Di str i buti on to owner s Compr ehensi ve i ncome Revenue Expenses Gai ns L osses Chapter 2-5 LO 5 D efi ne the ba si c el ements of fi na nci a l sta tements. T hi r d Level : Assumpti ons Economi c Enti ty company keeps i ts acti vi ty separ ate fr om i ts owner s and other busi nesses. Goi ng Concer n - company to l ast l ong enough to ful fi l l objecti ves and commi tments. M oneta r y U ni t - money i s the common denomi nator . Per i odi ci ty - company can di vi de i ts economi c acti vi ti es i nto ti me per i ods. Chapter 2-6 LO 6 D escr i be the ba si c a ssumpti ons of a ccounti ng. T hi r d Level : Pr i nci pl es M ea sur ement The most commonl y used measur ements ar e based on hi stor i ca l cost and fa i r va l ue. I ssues: H i stor i cal cost pr ovi des a r el i abl e benchmar k for measur i ng hi stor i cal tr ends. Fai r val ue i nfor mati on may be mor e useful . Recentl y the FASB has taken the step of gi vi ng compani es the opti on to use fai r val ue as the basi s for measur ement of fi nanci al assets and fi nanci al l i abi l i ti es. Chapter 2-7 Repor ti ng of fai r val ue i nfor mati on i s i ncr easi ng. LO 7 Expl a i n the a ppl i ca ti on of the ba si c pr i nci pl es of a ccounti ng. T hi r d Level : Pr i nci pl es Revenue Recogni ti on - gener al l y occur s (1) when r eal i zed or r eal i zabl e and (2) when ear ned. SAB 101 Excepti ons: Dur i ng Pr oducti on. At End of Pr oducti on Upon Recei pt of Cash Ri sks and benefi ts Abi l i ty to esti mate amount not to be col l ected Retur ns Chapter 2-8 LO 7 Expl a i n the a ppl i ca ti on of the ba si c pr i nci pl es of a ccounti ng. T hi r d Level : Pr i nci pl es M a tchi ng - effor ts (expenses) shoul d be matched wi th accompl i shment (r evenues) whenever i t i s r easonabl e and pr acti cabl e to do so. "L et the expense fol l ow the r evenues." I l l ustr ati on 2-4 Recogni ti on Expense Chapter 2-9 LO 7 Expl a i n the a ppl i ca ti on of the ba si c pr i nci pl es of a ccounti ng. T hi r d Level : Pr i nci pl es Ful l D i scl osur e pr ovi di ng i nfor mati on that i s of suffi ci ent i mpor tance to i nfl uence the judgment and deci si ons of an i nfor med user . Pr ovi ded thr ough: Fi nanci al Statements Notes to the Fi nanci al Statements Suppl ementar y i nfor mati on Other consi der a ti ons by ma na gement Chapter 2-10 LO 7 Expl a i n the a ppl i ca ti on of the ba si c pr i nci pl es of a ccounti ng. T hi r d Level : Constr a i nts Cost Benefi t the cost of pr ovi di ng the i nfor mati on must be wei ghed agai nst the benefi ts that can be der i ved fr om usi ng i t. M a ter i a l i ty - an i tem i s mater i al i f i ts i ncl usi on or omi ssi on woul d i nfl uence or change the judgment of a r easonabl e per son. SAB 99 I ndustr y Pr a cti ce - the pecul i ar natur e of some i ndustr i es and busi ness concer ns someti mes r equi r es depar tur e fr om basi c accounti ng theor y. Conser va ti sm when i n doubt, choose the sol uti on Chapter 2-11 that wi l l be l east l i kel y to over state assets and i ncome. LO 8 D escr i be the i mpa ct tha t constr a i nts ha ve on r epor ti ng a ccounti ng i nfor ma ti on. Side Note Pro-forma financial statements Earnings Management Sarbanes-Oxley PCAOB Independence and MAS Audit Committee Certification and claw back* Rule 203 Chapter 2-12 ...
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This note was uploaded on 08/31/2009 for the course DRXL 100 taught by Professor All during the Spring '09 term at Drexel.

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