(Chapter 2) Problem Set 1 - Due September 17, 2006

(Chapter 2) Problem Set 1 - Due September 17, 2006 -...

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Questions 1. A conceptual framework is “a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial standards.” Pretty much, it’s a system of checks and balances that oversees what we consider the consistent accounting standards of today. It’s necessary in financial accounting because it allows regulations such as the FASB to be followed in an orderly manner, and standardizes nationwide accounting practices. Also, it is easier to solve common problems during accounting if one had a previous “framework” to fall back on and consult with. 2. The primary objectives of financial reporting as indicated in Statement of Financial Accounting Concepts No. 1 is that one should provide information that is 1) useful to those making investment and credit decisions who have a reasonable understanding of business and economic activities 2) helpful to present and potential investors, creditors, and other uses in assessing the amounts, timing, and uncertainty of future cash flows 3) about economic resources, the claims to those resources, and the changes in them Pretty much, the information should concern interested parties, present the cash flows, income statements, and balance sheets concerning the business entity in question. 4. The two primary qualities of useful accounting information are 1) Relevance – information needs to be capable of making a difference in a decision. If it wasn’t there, would the interested party make a different decision? If you can answer yes to that, then yes, the information at hand is relevant to the current situation. 2) Reliability – is it verifiable? Is it a faithful representation? Is it reasonably free of error and bias? Not all users of the information at hand have the time to make these
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checks themselves, so the information provided must comply with the previous three questions. 5. According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on the needs of the users of financial statements. The users of these aforementioned financial statements are potential investors and creditors of the
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