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Accounting Framework

Accounting Framework - Accounting Framework Conceptual...

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Accounting Framework Conceptual Framework 1. A conceptual framework in accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements. The benefits its development will generate can be characterized as follows: (a) it should be easier to promulgate a coherent set of standards and rules; and (b) practical problems should be more quickly solved. 2. The FASB recognized the need for a conceptual framework upon which a consistent set of financial accounting standards could be based. The FASB has issued six Statements of Financial Accounting Concepts (SFAC) that relate to financial reporting. They are listed and described briefly below: SFAC No. 1. “Objectives of Financial Reporting by Business Enterprises” presents the goals and purposes of accounting. SFAC No. 2. “Qualitative Characteristics of Accounting Information” examines the characteristics that make accounting information useful. SFAC No. 3. “Elements of Financial Statements of Business Enterprises” defines the broad classifications of items found in financial statements. SFAC No. 5. “Recognition and Measurement in Financial Statements of Business Enterprises” gives guidance on what information should be formally incorporated into financial statements and when. SFAC No. 6. “Elements of Financial Statements” replaces SFAC No. 4 and expands its scope to include not-for-profit organizations. SFAC No. 7. “Using Cash Flow Information and Present Value in Accounting Measurements,” provides a framework for using expected future cash flows and present values as a basis for measurement. Basic Objectives 3. SFAC No. 1 describes the objectives of financial reporting as the presentation of information that is useful (a) in making investment and credit decisions, (b) in assessing cash flow prospects, and (c) in learning about economic resources, claims to those resources, and changes in them. SFAC No. 2 identifies the primary and secondary qualitative characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.
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Primary Qualities 4. The primary qualities that make accounting information useful for decision making are relevance and reliability . Relevance. Accounting information is relevant if it is capable of making a difference in a decision. For information to be relevant, it should have predictive or feedback value, and it must be presented on a timely basis.
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