Chapter 02 - Slides_1

Chapter 02 - Slides_1 - Chapter 2 Objectives Objectives 1....

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 2 Objectives Objectives 1. 2. Conceptual Framework Professor Dennis Chambers ACC 301 301 3. 4. 5. 6. 7. 8. Describe the usefulness of a conceptual framework th Describe the FASB’s efforts to construct a conceptual framework Understand the objectives of financial reporting Identify and explain the qualitative characteristics of accounting information accounting information Define the basic elements of financial statements. Describe the basic assumptions of accounting Explain the basic principles of accounting Describe the constraints on reporting financial information information ACC 301 2 6/9/2008 Why have a conceptual framework? Assists FASB to create consistent and Assists FASB to create consistent and coherent coherent standards Prior to FASB, accounting standards were not Prior based on an accepted conceptual foundation Standards Standards were contradictory Statements of Financial Accounting Concepts The FASB has issued seven Statements of The FASB has issued seven Statements of Financial Financial Accounting Concepts (SFACs) These statements deal with major These statements deal with major recognition recognition and reporting issues Statement pertains to reporting by non Statement 4 pertains to reporting by nonbusiness entities The other six statements pertain to The other six statements pertain to reporting reporting by business enterprises Emerging issues can be dealt with more Emer quickly Guidance Guidance for preparers when no standard exists 6/9/2008 ACC 301 3 6/9/2008 ACC 301 4 The The topics covered by the concept statements statements Objectives of financial reporting Objectives of financial reporting Qualitative Qualitative characteristics of financial reporting reporting The The elements of financial statements Recognition concepts Reco Measurement concepts Measurement Overview of the Conceptual Framework Framework The Framework can be thought of as The Framework can be thought of as having having three different levels The first level consists of objectives The first level consists of objectives The The second level explains financial elements and characteristics of information and characteristics of information The The third level incorporates recognition and measurement criteria measurement criteria 6/9/2008 ACC 301 5 6/9/2008 ACC 301 6 Visual Model of the Conceptual Framework Framework Objectives of Financial Reporting of Financial Reporting To provide information: about about economic resources, the claims on those resources and changes in them. that is useful to those making investment and credit that decisions. that that is useful to present and future investors, creditors in assessing future cash flows. to to individuals who reasonably understand business and economic activities. Decision Decision Usefulness is the key objective 6/9/2008 ACC 301 7 6/9/2008 ACC 301 8 Qualitative Qualitative Characteristics of Financial Information Define the characteristics that make Define the characteristics that make accounting accounting information useful. There is hierarchy of qualities that we There is a hierarchy of qualities that we want want financial information to possess. Hierarchy of Qualities of Qualities Decision Makers & their characteristics Cost/Benefit Constraint Materiality Constraint Decision Usefulness Relevance Reliability Predictive or Feedback Value Timeliness Verifiability Neutrality Representational Faithfulness Comparability & Consistency 6/9/2008 ACC 301 9 6/9/2008 ACC 301 10 Hierarchy of Qualities of Qualities Decision Makers & their characteristics Relevance Definition Definition The capacity of information to make The capacity of information to make a difference difference in a decision Cost/Benefit Constraint Materiality Constraint Decision Usefulness Relevance Reliability Ingredients Ingredients of relevance Representational Faithfulness Predictive or Feedback Value Timeliness Verifiability Neutrality Comparability & Consistency Predictive Predictive Value Feedback Feedback Value Timeliness 6/9/2008 ACC 301 12 6/9/2008 ACC 301 11 Hierarchy of Qualities Hierarchy of Qualities Decision Makers & their characteristics Reliability Definition: Definition: Reliable Reliable information is reasonably free from error and bias and faithfully represents what it error and bias and faithfully represents what it purports purports to represent Cost/Benefit Constraint Materiality Constraint Decision Usefulness Ingredients of Reliability Ingredients of Reliability Relevance Reliability Predictive or or Feedback Value Timeliness Verifiability Neutrality Representational Faithfulness Verifiability Verifiability Representational Faithfulness Representational Faithfulness Neutrality Neutrality 6/9/2008 ACC 301 14 Comparability & Consistency 6/9/2008 ACC 301 13 Reliability: Verifiability Verifiability Independent measurers using the same Independent measurers, using the same methods, methods, obtain similar results Auditors are in the business of verification Auditors are in the business of verification Reliability: Representational Faithfulness The numbers and descriptions represent The numbers and descriptions represent what what really existed or happened The accounting numbers faithfully The accounting numbers faithfully represent represent the underlying economic activity 6/9/2008 ACC 301 15 6/9/2008 ACC 301 16 Reliability: Neutrality Reliability: Neutrality Preparation Neutrality: Pr Information Information cannot be selected to favor one group over another No intentional bias No intentional bias Hierarchy of Qualities of Qualities Decision Makers & their characteristics Cost/Benefit Constraint Materiality Constraint Decision Usefulness Standard Setting Neutrality: Standard Setting Neutrality: Accounting Accounting standards should not be designed to purposely change behavior Standards Standards should not purposely favor one group over another Relevance Reliability Predictive or Feedback Value Timeliness Verifiability Neutrality Representational Faithfulness Comparability & Consistency Consistency 6/9/2008 ACC 301 17 6/9/2008 ACC 301 18 Comparability & Consistency Consistency Comparison across firms Comparison across firms Consistence Consistence across years Value Value of “benchmarking” Hierarchy of Qualities of Qualities Decision Makers & their characteristics Cost/Benefit Constraint Materiality Constraint Decision Usefulness Relevance Reliability Not Not just simply doing the accounting the same—e.g., Capital leases vs. Simple me le Simple leases leases 6/9/2008 ACC 301 19 Predictive or Feedback Value Value Timeliness Verifiability Neutrality Representational Faithfulness Comparability & Consistency 6/9/2008 ACC 301 20 Constraints Constraints Cost Benefit Cost < Benefit Materiality Materiality Elements of Financial Statements of Financial Statements Assets Assets Liabilities Liabilities Equity Equity Investments Investments by Owners Owners Distributions Distributions by Owners Owners Comprehensive Comprehensive Income Income Revenues Revenues Expenses Expenses Gains Gains Losses Losses 6/9/2008 ACC 301 21 6/9/2008 ACC 301 22 Assets Definition: Definition: Assets are the probable future economic benefits obtained or controlled by particular benefits obtained or controlled by a particular entity entity as a result of past transactions or events “…probable future economic benefits…” benefits…” Future economic benefits Future economic benefits The The asset is the future benefit, not the physical item physical item Uncertainty is part of this definition Uncertainty is part of this definition— probability not certainty 6/9/2008 ACC 301 23 6/9/2008 ACC 301 24 “…obtained or controlled…” or controlled The entity must have ownership or control The entity must have ownership or control The The entity can obtain the benefits and control others’ access control others access “…result of past transactions or events.” events.” The future benefit arises from past The future benefit arises from a past occurrence occurrence Must be some past transaction or event Must be some past transaction or event 6/9/2008 ACC 301 25 6/9/2008 ACC 301 26 Liabilities Definition: Definition: Liabilities are probable future sacrifices of economic benefits arising from present economic benefits arising from present obligations obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events Three characteristics of liabilities: liabilities: A present duty or responsibility to transfer present duty or responsibility to transfer economic economic benefits The entity is obligated to fulfill the duty The entity is obligated to fulfill the duty— little or no discretion Transaction or event creating the th obligation has already occurred 6/9/2008 ACC 301 27 6/9/2008 ACC 301 28 Comprehensive Income Comprehensive Income Definition: Definition: Comprehensive income is the change in equity of business enterprise during period from of a business enterprise during a period from transactions transactions and other events from non-owner nonsources Compare comprehensive income income and net income? Comprehensive income includes all non-owner Comprehensive income includes all non owner changes changes in equity Net Net income does not include some changes in equity Foreign Foreign currency adjustments Unrealized Unrealized gains and losses on some investments Unrealized Unrealized gains and losses on some derivative investments 6/9/2008 ACC 301 29 6/9/2008 ACC 301 30 Characteristics in conflict in conflict Often reliability and relevance are in Often reliability and relevance are in “tension” “tension” Consider valuing assets at historical cost vs Consider valuing assets at historical cost vs. market value Recognition Criteria Criteria Define Recognition: Define Recognition: Process of formally recording or incorporating an item into the financial statements an item into the financial statements Purpose of Recognition Criteria Purpose of Recognition Criteria Provides Provides guidance for: How How an item is recognized item is recognized When When an item is recognized 6/9/2008 ACC 301 31 6/9/2008 ACC 301 32 Fundamental Recognition Criteria Fundamental Recognition Criteria Must meet the definition of an element Must meet the definition of an element Must be measurable Must Must be relevant Must Must be reliable 6/9/2008 ACC 301 33 Basic Principles Principles Revenue Recognition Principle Revenue Recognition Principle Earned Earned Realized or realizable Realized or realizable Historical Historical Cost Principle Somewhat weakened lately—more and more Somewhat weakened lately more and more market market value valuation Matching Principle Matchin Full Full Disclosure Principle 6/9/2008 ACC 301 34 Basic Assumptions Assumptions Economic Entity Assumption Economic Entity Assumption Economic Economic activity can be identified with a particular entity—not always easy (Enron) particular entity always easy (Enron) The Future… Future The FASB and IASB are jointly re writing The FASB and IASB are jointly re-writing the the Conceptual Framework Combining current FASB and IASB Combining current FASB and IASB frameworks frameworks and end up with a common framework. Going Going Concern Assumption Monetary Unit Assumption Periodicity Periodicity Assumption Will Will probably involve significant changes to the Conceptual Framework to the Conceptual Framework 6/9/2008 ACC 301 35 6/9/2008 ACC 301 36 ...
View Full Document

This note was uploaded on 01/20/2011 for the course ACC 301 taught by Professor Staff during the Fall '08 term at Kentucky.

Ask a homework question - tutors are online