ACIS+3115+Ch02+Student+Fall+2010

ACIS+3115+Ch02+Student+Fall+2010 - CHAPTER 2 CONCEPTUAL...

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Unformatted text preview: CHAPTER 2 CONCEPTUAL FRAMEWORK CONCEPTUAL UNDERLYING FINANCIAL ACCOUNTING Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 2 -1 Conceptua l Fr a mewor k T he N eed for a Conceptua l Fr a mewor k To devel op a coher ent set of standar ds and r ul es To sol ve new and emer gi ng pr acti cal pr obl ems Chapter 2 -2 LO 1 D escr i be the useful ness of a conceptua l fr a mewor k. D evel opment of Conceptua l Fr a mewor k The FASB has i ssued si x Sta tements of Fi na nci a l Accounti ng Concepts (SFAC) for busi ness enter pr i ses. SFAC N o.1 - Objecti ves of Fi nanci al Repor ti ng SFAC N o.2 - Qual i tati ve Char acter i sti cs of Accounti ng I nfor mati on SFAC N o.3 - E l ements of Fi nanci al Statements (super ceded by SFAC No. 6) SFAC N o.5 - Recogni ti on and M easur ement i n Fi nanci al Statements SFAC N o.6 - E l ements of Fi nanci al Statements (r epl aces SFAC No. 3) SFAC N o.7 - Usi ng Cash Fl ow I nfor mati on and Pr esent Val ue i n A ccounti ng M easur ements Chapter 2 -3 Objecti ve 2 LO 2 D escr i be the FASB’s effor ts to constr uct a conceptua l fr a mewor k. Conceptua l Fr a mewor k T he Fr a mewor k i s compr i sed of thr ee l evel s: Fi r st Level = B asi c Objecti ves Second Level = Qual i tati ve Char acter i sti cs and B asi c El ements T hi r d Level = Recogni ti on and M easur ement Concepts. The FASB and the IASB have agreed on a joint project to develop a common and improved conceptual framework. Chapter 2 -4 LO 2 D escr i be the FASB’s effor ts to constr uct a conceptua l fr a mewor k. ASSUMPTIONS 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity PRINCIPLES 1. Measurement 2. Revenue recognition 3. Expense recognition 4. Full disclosure CONSTRAINTS 1. Cost-benefit 2. Materiality 3. Industry practice 4. Conservatism Third level QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS Relevance Reliability Comparability I l l ustr a ti on 2-7 Conceptual Fr amewor k f or Fi nanci al Repor ti ng Consistency ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second level 1. 1. 2. 2. 3. 3. Chapter 2 -5 OBJECTIVES Useful in investment and credit decisions and Useful in assessing future cash flows future About enterprise resources, claims to resources, and changes in them changes First level L O 2 D escr i be the FASB’s LO effor ts to constr uct a conceptua l fr a mewor k. conceptua Second Level : Funda menta l Concepts Qua l i ta ti ve Cha r a cter i sti cs “ The FASB i denti fi ed the Q ua l i ta ti ve C ha r a cter i sti cs of accounti ng i nfor mati on that d i sti ngui sh better (mor e useful ) i nfor mati on fr om i nfer i or (l ess useful ) i nfor mati on for deci si on-maki ng pur poses.” Chapter 2 -6 L O 4 I denti fy the qua l i ta ti ve cha r a cter i sti cs of a ccounti ng LO Second Level : Qua l i ta ti ve Second Cha r a cter i sti cs C ha I l l ustr a ti on 2-2 H i er ar chy of Accounti ng Qual i ti es Chapter 2 -7 L O 4 I denti fy the qua l i ta ti ve cha r a cter i sti cs of a ccounti ng LO The exi sti ng conceptual fr amewor ks under l yi ng U.S. GAAP and i GAAP ar e ver y si mi l ar . The conver ged fr amewor k shoul d be a si ngl e document, unl i ke the t wo conceptual fr amewor ks that pr esentl y exi st. The I ASB fr amewor k makes two assumpti ons. One assumpti on i s t hat fi nanci al statements ar e pr epar ed on an accr ual basi s; the other i s that the r epor ti ng enti ty i s a goi ng concer n. Ther e i s some agr eement that the r ol e of fi nanci al r epor ti ng i s to assi st user s i n deci si on maki ng. H owever , other s note that another objecti ve i s to pr ovi de i nfor mati on on management’s per for mance, often r efer r ed to as stewar dshi p. Chapter 2 -8 I FRS Conceptua l Fr a mewor k Framework originally issued by IASC in 2001 Specifically addresses: Objectives of financial statements Qualitative characteristics Concepts of capital and capital maintenance Elements of financial statements Differences Capital with GAAP and capital maintenance Elements of financial statements Qualitative characteristics Chapter 2 -9 Conceptua l Fr a mewor k Revi ew: A conceptual fr amewor k under l yi ng fi nanci al accounti ng i s i mpor tant because i t can l ead to consi stent standar ds and i t pr escr i bes the n atur e, functi on, and l i mi ts of fi nanci al accounti ng and fi nanci al statements. accounti Chapter 2-10 LO 1 D escr i be the useful ness of a conceptua l fr a mewor k. Conceptua l Fr a mewor k Revi ew: A conceptual fr amewor k under l yi ng fi nanci al accounti ng i s necessar y because futur e accounti ng pr acti ce pr obl ems can be sol ved by r efer ence to the conceptual fr amewor k and a f or mal standar d-setti ng body wi l l not be necessar y. n ecessar Chapter 2-11 LO 1 D escr i be the useful ness of a conceptua l fr a mewor k. Conceptua l Fr a mewor k Revi ew: What ar e the Statements of Fi nanci al Accounti ng What Concepts i ntended to establ i sh? Concepts a. Gener al l y accepted accounti ng pr i nci pl es i n Gener fii nanci al r epor ti ng by busi ness enter pr i ses. f T he meani ng of “Pr esent fai r l y i n accor dance wi th The gener al l y accepted accounti ng pr i nci pl es.” gener T he objecti ves and concepts for use i n devel opi ng The standar ds of fi nanci al accounti ng and r epor ti ng. standar T he hi er ar chy of sour ces of gener al l y accepted The accounti ng pr i nci pl es. accounti (CPA adapted) b. c. d. (CPA adapted) Chapter 2-12 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 Revi ew: A ccor di ng to the FASB conceptual fr amewor k, the Accor objecti ves of fi nanci al r epor ti ng for busi ness enter pr i ses ar e based on? enter a. b. c. d. Gener al l y accepted accounti ng pr i nci pl es Repor ti ng on management’s stewar dshi p. The need for conser vati sm. The needs of the user s of the i nfor mati on. The current proposed converged framework adopts the FASB’s focus on investors and creditors. Chapter 2-13 LO 3 Second Level : Qua l i ta ti ve Second Cha r a cter i sti cs C ha Revi ew: Rel evance and r el i abi l i ty ar e the two pr i mar y qual i ti es that make accounti ng i nfor mati on useful for deci si on maki ng. f or T o be r el i abl e, accounti ng i nfor mati on must be To capabl e of maki ng a di ffer ence i n a deci si on. capabl Chapter 2-14 L O 4 I denti fy the qua l i ta ti ve cha r a cter i sti cs of a ccounti ng LO Second Level : Qua l i ta ti ve Second Cha r a cter i sti cs C ha Revi ew: A dher ence to the concept of consi stency r equi r es t hat the same accounti ng pr i nci pl es be appl i ed to si mi l ar tr ansacti ons for a mi ni mum of fi ve year s befor e any change i n pr i nci pl e i s adopted. befor Chapter 2-15 L O 4 I denti fy the qua l i ta ti ve cha r a cter i sti cs of a ccounti ng LO Second Level : Ba si c El ements Revi ew: A ccor di ng to the FASB conceptual fr amewor k, an enti ty’s Accor r evenue may r esul t fr om a. b. A decr ease i n an asset fr om pr i mar y oper ati ons. A n i ncr ease i n an asset fr om i nci dental An tr ansacti ons. tr A n i ncr ease i n a l i abi l i ty fr om i nci dental An tr ansacti ons. tr A decr ease i n a l i abi l i ty fr om pr i mar y oper ati ons. (CPA adapted) c. d. Chapter 2-16 LO 5 D efi ne the ba si c el ements of fi na nci a l sta tements. Second Level : Ba si c El ements Exer ci se 2-3: I denti fy the el ement or el ements associ ated wi th i tems bel ow. El ements (a) Ar i ses fr om per i pher al or (a) i nci dental tr ansacti ons. (b) Obl i gati on to tr ansfer (b) r esour ces ar i si ng fr om a past tr ansacti on. tr (c) I ncr eases owner shi p i nter est. (d) Decl ar es and pays cash (d) dii vi dends to owner s. d (e) I ncr eases i n net assets i n a (e) per i od fr om nonowner sour ces. sour Chapter 2-17 Assets L i abi l i ti es E qui ty Equi I nvestment by owner s Di str i buti on to owner s Compr ehensi ve i ncome Revenue Expenses Gai ns Gai L osses LO 5 Second Level : Ba si c El ements Exer ci se 2-3: I denti fy the el ement or el ements associ ated wi th i tems bel ow. El ements (f) I tems char acter i zed by futur e economi c benefi t. f utur (g) E qual s i ncr ease i n net Equal assets dur i ng the year , after addi ng di str i buti ons to owner s and subtr acti ng i nvestments by owner s. (h) A r i ses fr om i ncome Ar statement acti vi ti es that consti tute the enti ty’s ongoi ng major or centr al Chapter oper ati ons. oper 2-18 Assets L i abi l i ti es E qui ty Equi I nvestment by owner s Di str i buti on to owner s Compr ehensi ve i ncome Revenue Expenses Gai ns Gai L osses LO 5 Second Level : Ba si c El ements Exer ci se 2-3: I denti fy the el ement or el ements associ ated wi th i tems bel ow. El ements (i ) Resi dual i nter est i n the net (i assets of the enter pr i se. assets (j) I ncr eases assets thr ough sal e (j) of pr oduct. of (k) D ecr eases assets by (k) pur chasi ng the company’s own stock. own (l ) Changes i n equi ty dur i ng the (l per i od, except those fr om i nvestments by owner s and dii str i buti ons to owner s. d Chapter 2-19 Assets L i abi l i ti es E qui ty Equi I nvestment by owner s Di str i buti on to owner s Compr ehensi ve i ncome Revenue Expenses Gai ns Gai L osses LO 5 T hi r d Level : Assumpti ons Br i ef Exer ci se 2-4: I denti fy whi ch basi c assumpti on of accounti ng i s best descr i bed i n each i tem bel ow. (a) The economi c acti vi ti es of KC Cor por ati on ar e d i vi ded i nto 12-month per i ods for the pur pose of i ssui ng annual r epor ts. (b) Sol ectr on Cor por ati on, I nc. does not adjust amounts i n i ts fi nanci al statements for the effects of i nfl ati on. (c) Wal gr een Co. r epor ts cur r ent and noncur r ent cl assi fi cati ons i n i ts bal ance sheet. (d) T he economi c acti vi ti es of Gener al El ectr i c and i ts subsi di ar i es ar e mer ged for accounti ng and r epor ti ng pur poses. Chapter 2-20 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 Br i ef Exer ci se 2-5: I denti fy whi ch basi c pr i nci pl e of accounti ng i s best descr i bed i n each i tem bel ow. (a) KC Cor por ati on r epor ts r evenue i n i ts i ncome statement when i t i s ear ned i nstead of when the cash i s col l ected. (b) Yahoo, I nc. r ecogni zes depr eci ati on expense for a m achi ne over the 2-year per i od dur i ng whi ch that m achi ne hel ps the company ear n r evenue. (c) Or acl e Cor por ati on r epor ts i nfor mati on about pendi ng l awsui ts i n the notes to i ts fi nanci al statements. (d) Eastman Kodak Company r epor ts l and on i ts bal ance sheet at the amount pai d to acqui r e i t, even t hough the esti mated fai r mar ket val ue i s gr eater . Chapter 2-21 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 Br i ef Exer ci se 2-7: What accounti ng constr ai nts ar e i l l ustr ated by the i tems bel ow? (a) K C, I nc. r epor ts agr i cul tur al cr ops on i ts bal ance sheet at mar ket val ue. (b) Rafael Cor por ati on does not accr ue a conti ngent l awsui t gai n of $650,000. (c) Wi l l i s Company does not di scl ose any i nfor mati on i n the notes to the fi nanci al statements unl ess the val ue of the i nfor mati on to user s exceeds the expense of gather i ng i t. (d) F avr e Cor por ati on expenses the cost of w astebaskets i n the year they ar e acqui r ed. LO 8 Chapter 2-22 IFRS 1. A. B. C. D. E. The conceptual framework for IFRS The addresses: addresses: Objectives of financial statements Qualitative characteristics Concepts of capital and capital Concepts maintenance maintenance All of the above None of the above Chapter 2-23 A. B. C. D. E. What is the status of the IFRS/US GAAP What convergence project related to conceptual frameworks? frameworks? No convergence is considered necessary, since the No framework is not an accounting standard framework It is part of the short-term convergence project It is part of the long-term convergence project Convergence has been completed None of the above Chapter 2-24 What What are differences between the conceptual framework for IFRS and US GAAP? framework A. Measurement methods B. Focus on reliability Focus C. Focus on understandability C. Focus D. a and b D. E. b and c and Chapter 2-25 Your company is considering switching from US GAAP to Your IFRS. Your CEO, Julie Jones, has asked you to identify the major differences in the conceptual frameworks of US GAAP and IFRS so that she can understand the different foundations of the accounting rules. of Chapter 2-26 ...
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This note was uploaded on 11/04/2010 for the course ACCT 2115 taught by Professor K during the Spring '10 term at Virginia College.

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