Chapter 2 Outline - Chapter 2 page 1 of 8 Chapter 2:...

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Chapter 2 page 1 of 8 Chapter 2: Conceptual Framework Underlying Financial Accounting 1) Conceptual Framework : (definition on page 28) a Need for Conceptual Framework i) ii) iii) iv) b Development of Conceptual Framework FASB began working on the conceptual framework in 1976. FASB has issued 6 Statements of Financial Accounting Concepts (SFACs). i) SFAC No. 1 , “Objectives of Financial Reporting by Business Enterprises,” presents goals and purposes of accounting. ( See First Level: Basic Objectives .) ii) SFAC No. 2 , “Qualitative Characteristics of Accounting Information,” examines the characteristics that make accounting information useful. ( See Second Level: Fundamental Concepts in Illustration 2-1 on page 30 ; also, refer to Illustration 2-2 on page 32 .) iii) SFAC No. 3 , “Elements of Financial Statements of Business Enterprises,” provides definitions of items in financial statements, such as assets, liabilities, revenues, and expenses. iv) SFAC No. 4 , “Objectives of Financial Reporting by Nonbusiness Organizations” v) SFAC No. 5 , “Recognition and Measurement in Financial Statements of Business Enterprises,” sets forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when. ( See Third Level: Recognition and Measurement Concepts in Illustration 2-1 on page 30 .) vi) SFAC No. 6 , “Elements of Financial Statements,” replaces SFAC No. 3 and expands its scope to include not-for-profit organizations. (1) Statement of Financial Position (i.e., Balance Sheet): Include assets, liabilities, and equity. (2) Earnings for the Period : Does not include prior period adjustments (Stockholders’ Equity Statement) or changes in accounting principles. (3) Comprehensive Income : any change in Net Assets (Assets – Liabilities) (4) Cash Flows during period : 3 sources – a) Operations, b) Financing, c) Investing
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Chapter 2 page 2 of 8 (5) Investments and Distributions to Owners : Statement of Stockholders’ Equity: Beginning Capital + Investment + Earnings – Dividends = Ending Capital vii) SFAC No. 7 , “Using Cash Flow Information and Present Value in Accounting Measurements,” provides a framework for using expected future cash flows and present values as a basis for measurement. Note : See Illustration 2-1 on page 30. Homework : Q2, E1, 2, 3 2) First Level: Basic Objectives (SFAC No. 1) : Identify the goals and purposes of accounting. Objectives provide information: a b c Decision usefulness is key to the conceptual framework. General-purpose financial statements provide the most useful information possible at minimal cost to users. Of course, users need to have a reasonable knowledge of business and financial accounting measures to understand financial statements.
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Chapter 2 Outline - Chapter 2 page 1 of 8 Chapter 2:...

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