CHAPTER 1 The Conceptual Framework

CHAPTER 1 The Conceptual Framework - Environment and...

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Environment and Theoretical Structure of Financial Accounting THE CONCEPTUAL FRAMEWORK The conceptual framework was developed to guide the FASB in developing financial accounting standards. It consists of a series of Statements of Financial Accounting Concepts which will be discussed below: SFAC #1 “Objectives of Financial Reporting by Business Enterprises” The objectives of the conceptual framework is to provide information 1. Useful for decision making. 2. That helps predict cash flows. 3. About economic resources, claims to resources, and changes in resources and claims SFAC #2 “Qualitative Characteristics of Accounting Information” The qualitative characteristics of accounting information include: 1. User-Specific Quality-Understandability , users must be able to understand the financial statements in the context of making investment and/or credit decisions. Users are expected to have some degree of knowledge and be willing to study the financial statements. 2. Overriding Objectives-Decision Usefulness requires that the financial statements are useful in making investment and/or credit decisions. 3. Primary Qualities A. Relevance -the accounting information must make a difference in the decision making process. The components of relevance are: (1) Predictive value , the information should be useful in predicting future cash flows. (2) Feedback value , the information should confirm investor expectations about future cash flows based on net income. (3) Timeliness , the information must be available in time to make investment and/or credit decisions. B. Reliability -the accounting information must be verifiable, representationally faithful and neutral . (1) Verifiability , the accounting information is objectively obtained. (2) Representational Faithfulness. there is agreement between the measure and what users would assume that the measure represents. (3) Neutrality , the information does not favor one particular group over other interested parties. 4.
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This note was uploaded on 02/01/2012 for the course ACF ACC220 taught by Professor Fiona during the Spring '08 term at Seneca.

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CHAPTER 1 The Conceptual Framework - Environment and...

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