2-conceptual-framework-underlying-financial-accounting

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30 C H A P T E R 2 CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING LEARNING OBJECTIVES After studying this chapter, you should be able to: Describe the usefulness of a conceptual framework. Describe the FASB’s efforts to construct a conceptual framework. Understand the objectives of financial reporting. Identify the qualitative characteristics of accounting information. Define the basic elements of financial statements. Describe the basic assumptions of accounting. Explain the application of the basic principles of accounting. Describe the impact that constraints have on reporting accounting information. 8 7 6 5 4 3 2 1 Everyone agrees that accounting needs a framework—a conceptual framework, so to speak—that will help guide the development of stan- dards. To understand the importance of developing this framework, let’s see how you would respond in the following two situations. Is It an Asset or Not? “Taking a Long Shot . . . ” To supplement donations collected from its general community solicitation, Tri-Cities United Charities holds an Annual Lottery Sweepstakes. In this year’s sweepstakes, United Charities is offering a grand prize of $1,000,000 to the one winning ticket holder. A total of 10,000 tickets have been printed, and United Charities plans to sell all the tickets at a price of $150 each. Since its inception, the Sweepstakes has attracted area-wide interest, and United Charities has always been able to meet its sales target. However, in the unlikely event that it might fail to sell a sufficient number of tickets to cover the grand prize, United Charities has reserved the right to cancel the Sweepstakes and to refund the price of the tickets to holders. In recent years, a fairly active secondary market for tickets has developed. This year, buying–selling prices have varied between $75 and $95 before stabilizing at about $90. When the tickets first went on sale this year, multimillionaire Phil N. Tropic, well- known in Tri-Cities civic circles as a generous but sometimes eccentric donor, bought one of the tickets from United Charities, paying $150 cash. PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark
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31 Source : Adapted from Todd Johnson and Kim Petrone, The FASB Cases on Recognition and Measurement, Second Edition (New York: John Wiley and Sons, Inc. 1996). How would you answer the following questions? 1. Should Phil N. Tropic recognize his lottery ticket as an asset in his financial statements? 2. Assuming that Phil N. Tropic recognizes the lottery ticket as an asset, at what amount should it be reported? Some possible answers are $150, $100, and $90. 3. Should Hard Rock recognize a liability for site restoration in conjunction with the opening of the Lonesome Doe Mine? If so, what is the amount of that liability?
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