Kieso_Inter_13e_Ch02

Kieso_Inter_13e_Ch02 - CHAPTER 2 CONCEPTUAL FRAMEWORK...

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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 Financial Accounting and Accounting Standards Conceptual Conceptual Framework Framework First Level: Basic First Objectives Objectives Second Level: Second Fundamental Concepts Concepts Qualitative Qualitative characteristics characteristics Basic elements Third Level: Third Recognition and Measurement Measurement Basic assumptions Basic principles Constraints Need Development Decision Decision usefulness usefulness Information about Information economic resources resources Chapter 2 -2 Conceptual Framework The Need for a Conceptual Framework To develop a coherent set of standards and rules To solve new and emerging practical problems Chapter 2 -3 LO 1 Describe the usefulness of a conceptual framework. Development of Conceptual Framework The FASB has issued six Statements of Financial Accounting Concepts (SFAC) for business enterprises. SFAC No.1 ­ Objectives of Financial Reporting SFAC No.2 ­ Qualitative Characteristics of Accounting Information SFAC No.3 ­ Elements of Financial Statements (superceded by SFAC No. 6) SFAC No.5 ­ Recognition and Measurement in Financial Statements SFAC No.6 ­ Elements of Financial Statements (replaces SFAC No. 3) SFAC No.7 ­ Using Cash Flow Information and Present Value in Accounting Measurements Chapter 2 -4 LO 2 Describe the FASB’s efforts to construct a conceptualObjective 2 framework. Conceptual Framework The Framework is comprised of three levels: First Level = Basic Objectives Second Level = Qualitative Characteristics and Basic Elements Third Level = Recognition and Measurement Concepts. The FASB and the IASB have agreed on a joint project to develop a common and improved conceptual framework. Chapter 2 -5 LO 2 Describe the FASB’s efforts to construct a conceptual framework. 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 Illustration 2-7 Conceptual Framework for Financial Reporting 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 -6 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 LO 2 Describe the FASB’s LO efforts to construct a conceptual framework. conceptual First Level: Basic Objectives Financial reporting should provide information that: (a) is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. (b) helps present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. (c) portrays the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources. Chapter 2 -7 LO 3 Understand the objectives of financial reporting. First Level: Basic Objectives Review: According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on? a. b. c. d. Generally accepted accounting principles Reporting on management’s stewardship. The need for conservatism. The needs of the users of the information. The current proposed converged framework adopts the FASB’s focus on investors and creditors. Chapter 2 -8 LO 3 Second Level: Fundamental Concepts Question: How does a company choose an acceptable accounting method, the amount and types of information to disclose, and the format in which to present it? Answer: By determining which alternative provides the most useful information for decision­making purposes (decision usefulness). Chapter 2 -9 LO 4 Identify the qualitative characteristics of accounting information. Second Level: Fundamental Concepts Qualitative Characteristics “The FASB identified the Qualitative Characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision­making purposes.” Chapter 2-10 LO 4 Identify the qualitative characteristics of accounting information. ASSUMPTIONS 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity PRINCIPLES 1. Measurement 2. Revenue recognition 4. Full disclosure CONSTRAINTS 1. Cost-benefit 2. Materiality Relevance and Reliabilitypractice 3. Expense recognition 3. Industry 4. Conservatism QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS Relevance Reliability Comparability Consistency ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Third level Second level Illustration 2-7 Conceptual Framework for Financial Reporting 1. 1. 2. 2. 3. 3. Chapter 2-11 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 LO 4 Identify the qualitative LO characteristics of accounting information. accounting Second Level: Qualitative Characteristics Primary Qualities: Relevance – making a difference in a decision. Predictive value Feedback value Timeliness Reliability Verifiable Representational faithfulness Neutral ­ free of error and bias In the proposed converged conceptual framework, reliability will be replaced with “faithful representation” as one of the primary qualitative characteristics that must be present for information to be useful. Chapter 2-12 LO 4 Second Level: Qualitative Characteristics Review: Relevance and reliability are the two primary qualities that make accounting information useful for decision making. True To be reliable, accounting information must be capable of making a difference in a decision. False Chapter 2-13 LO 4 Identify the qualitative characteristics of accounting information. ASSUMPTIONS 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity PRINCIPLES 1. Measurement 2. Revenue recognition 4. Full disclosure CONSTRAINTS 1. Cost-benefit 2. Materiality Comparability and Consistency 3. Expense recognition 3. Industry practice 4. Conservatism QUALITATIVE QUALITATIVE CHARACTERISTICS CHARACTERISTICS Relevance Reliability Comparability Consistency ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Third level Second level Illustration 2-7 Conceptual Framework for Financial Reporting 1. 1. 2. 2. 3. 3. Chapter 2-14 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 LO 4 Identify the qualitative LO characteristics of accounting information. accounting Second Level: Qualitative Characteristics Secondary Qualities: Comparability – Information that is measured and reported in a similar manner for different companies is considered comparable. treatment to similar events from period to period. Consistency ­ When a company applies the same accounting Chapter 2-15 LO 4 Identify the qualitative characteristics of accounting information. Second Level: Qualitative Characteristics Review: Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years before any change in principle is adopted. False Chapter 2-16 LO 4 Identify the qualitative characteristics of accounting information. Third Level: Recognition and Measurement The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.” 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 Chapter 2-17 LO 6 Describe the basic assumptions of accounting. Third Level: Assumptions Economic Entity – company keeps its activity separate from its owners and other businesses. and commitments. Going Concern ­ company to last long enough to fulfill objectives Monetary Unit ­ money is the common denominator. Periodicity ­ company can divide its economic activities into time periods. Chapter 2-18 LO 6 Describe the basic assumptions of accounting. Third Level: Assumptions Brief Exercise 2-4: Identify which basic assumption of accounting is best described in each item below. (a) The economic activities of KC Corporation are divided into 12­month periods for the purpose of issuing annual reports. (b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. (c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. Periodicity Monetary Unit Going Concern Economic Economic Entity Entity Chapter 2-19 LO 6 Describe the basic assumptions of accounting. Third Level: Principles Measurement – The most commonly used measurements are based on historical cost and fair value. Issues: Historical cost provides a reliable benchmark for measuring historical trends. Fair value information may be more useful. Recently the FASB has taken the step of giving companies the option to use fair value as the basis for measurement of financial assets and financial liabilities. Reporting of fair value information is increasing. Chapter 2-20 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Revenue Recognition ­ generally occurs (1) when realized or realizable and (2) when earned. Exceptions: Illustration 2-4 Timing of Revenue Recognition Chapter 2-21 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Expense Recognition ­ “Let the expense follow the revenues.” Illustration 2-5 Expense Recognition Chapter 2-22 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Full Disclosure – providing information that is of sufficient Provided through: Financial Statements Notes to the Financial Statements Supplementary information importance to influence the judgment and decisions of an informed user. Chapter 2-23 LO 7 Explain the application of the basic principles of accounting. Third Level: Principles Brief Exercise 2-5: Identify which basic principle of accounting is best described in each item below. Revenue Revenue (a) KC Corporation reports revenue in its income statement when it is Recognitio Recognitio earned instead of when the cash is collected. n (b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2­year period during which thatmachine helps the company earn revenue. (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater. Chapter 2-24 Expense Expense Recognitio Recognitio n Full Full Disclosure Disclosure Measurement LO 7 Explain the application of the basic principles of accounting. Third Level: Constraints Cost Benefit – the cost of providing the information must be weighed against the benefits that can be derived from using it. influence or change the judgment of a reasonable person. Materiality ­ an item is material if its inclusion or omission would Industry Practice ­ the peculiar nature of some industries and business concerns sometimes requires departure from basic accounting theory. least likely to overstate assets and income. Conservatism – when in doubt, choose the solution that will be Chapter 2-25 LO 8 Describe the impact that constraints have on LO reporting accounting information. reporting Third Level: Constraints Brief Exercise 2-7: What accounting constraints are illustrated by the items below? (a) KC, Inc. reports agricultural crops on its balance sheet at market value. (b) Rafael Corporation does not accrue a contingent lawsuit gain of $650,000. (c) Willis Company does not disclose any information in the notes to the financial statements unless the value of the information to users exceeds the expense of gathering it. (d) Favre Corporation expenses the cost of wastebaskets in the year they are acquired. Chapter 2-26 Industry Industry Practice Practice Conservatism CostBenefit Materiality LO 8 ...
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This note was uploaded on 05/13/2011 for the course ACCT 3001 taught by Professor Moffitt during the Spring '08 term at LSU.

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