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Unformatted text preview: CHAPTER 2 REV IEW Conceptual F ramework: can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements 1 st Level: Basic 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 2 nd Level: Fundamental Concepts (2) 1. Qualitative Characteristics (2 Primary + 2 Secondary= 4) Primary Qualities 1. Relevance (3): Making a Difference in a Decision Mnemonic: Relevant is APFT a. Predictive value b. Feedback value c. Timeliness 2. Reliability (3) a. Verifiable b. Representational Faithfulness c. Neutral- free of error and bias Secondary Qualities 3. Comparability : Information that is measured and reported in a similar manner for different companies is considered comparable 4. Consistency : When a company applies the same accounting treatment to similar events from period to period 2. Elements (10) : Moment in Time (3) :Assets, Liabilities, Equity Period of Time (7) : Distribution to owners, Investment by owners, Comprehensive Income, Revenue, Expense, Gains and Losses. 3 rd Level: Recognition and Measurement (3) (A,P,C) 1. Assumptions (4) : Mnemonic: Ass=Eddie Getting Mad Periodically a. Economic Entity : company keeps its activities separate from its owners and other businesses (Merged w/ sub) b. Going Concern : company to last long enough to fulfill objectives and commitments (e.g., Accruals, Classify BS) c. Monetary Unit : money is the common denominator (e.g., Not adjust AMTs because of inflation) d. Periodicity : company can divide its economic activity into time periods 2. Principles (4) : Mnemonic: Pass Hotel Restaurant MGMT Fag a. Historical Cost : the price paid to acquire it, is the cost. b. Revenue Recognition: generally occurs (1) when realized or realizable and (2) when earned. c. Matching : efforts (expenses) should be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so. Let the expense follow the revenues. d. Full Disclosure : providing information that is of sufficient importance to influence the judgment and decisions of an informed user. 3. Constraints (4) : Mnemonic: CON: Catch Me If Conserved a. Cost Benefit : the cost of providing the information must be weighed against the benefits that can be derived from using it. Is it worth it to provide this info?...
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