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Chapter 2 - 1 Describe The usefulness of a concepTual...

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Unformatted text preview: 1. Describe The usefulness of a concepTual framework. 2. Describe The FASB's effarTs To cansTrucT a cancepTual framework. 3. UndersTand The objecTives of financial reporTing. 4. IdenTify The qualiTaTive characTerisTirs af accuunTing infarmaTion. 5. Define The basic elements of financial sTaTernenTs. 6. Describe The basic ossufinions of accounTing. 7. Expiain The appiicaTion of The basic principles of- lntermediate Accounting accounTing. 13th Edition 3. Describe The impocT ThaT co nsTrainTs have on reparTing Kieso, Weygandt, and Warfield accounfing infarrnafian. ' Chapter chap“! 2-? 272 The Need for :3 Conceptual Framework i To develop a coherenT seT of sTandarcls and rules a To solve new and emerging pracTical problems v Need a Decision g Oualflalive p Baa: assumplinns 1 Deteiapmenl “WWW ”WWI“ I Basic principles . lnlarmfinn abcm . aasiceiemenk . Emmi“ Ecunnmic resources “‘3" ch33!" L0 1 Describe the usefulness of a cancepfim' framework. Review: Review: A cancepTual framework underlying financial A cancepTual framework underlying financial accounTing is importanT because if can lead To accounTing is necessary because fuTure cansisTenT sTandards and H prescribes The accounTing pracTice problems can be solved by naTure, funcTion, and limiTs of financial reference To The concepTual framework and a accounTing and financial sTaTemenTs. formal sTandard-seTTing body will naT be necessary. True False Chg-gm LO 1 Describe The usefulness of a saucepan} fmmwork. Chg” L0 1 Describe fit; uxfiri'ness of a magma! 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SFAC No.2 A Qualitative Characteristics of Accounting'Informatian SFAC No.3 — Elements of Financial Statements (superceded by spec No. a) SFAC No.5 - Recognition and Measurement in Financial Statements SFAC No.6 - Elements of Financial Statements (replaces SFAC No. 3) SFAC No.7 -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 cpl23-")!kl LO 2 Describe the FASB': efforts to cons-crud a conceptual framework. Third level Second level Illustration 2.7 Conceptual Framework for Financial Reporting Firsl level L0 2 Describe The E4553“ efforts to cam-rm? 9 cm pm- conceptual framework. The Framework is comprised of three levels: I First Level: Basic Objectives 9 Second Level : Qualitative Characteristics and Basic Elements 0 Third Level = Recognition and Measurement Concepts. The FASE and the toss have agreed on a 5an ptujed to develop a common and improved conceptal new. Chg." L0 2 Basel-ah: the 5453's effort: to construct a conceptual fmmwork. Review: What are the Statements of Financial Accounting Concepts intended to establish? a. Generally accepted accounting principles in financial reporting by business enterprises. b. The meaning of "Present fairly in accordance with generally accepted accounting principles.” The objectives and concepts for use in developing standards of financial accounting and reporting. d. The hierarchy of sources of generally accepted accounting principles. 523$" [.0 2 Describe the 5453's efforts to cans-mm a concepnmf framework, Financial reporting should provide information that: Review: According to the FASB conceptoal framework, the objectives of financial reporting for business enterprises are based on? 0. Generally accepted accounting principles b, Reporting on management's stewardship. c. The need for conservatism. @ The needs of the users of the information. Thecutrem prapased converged framework adopts the FASB‘siows on Inveslms and madam. 242 L0 3 Question: How does a company choose an acceptable accounting method, the amount and types of information to disolose, and the format in which to present it? Answer: By determining which alternative provides the most useful information for decision—making purposes (decision usefulness). ' on ——-————- 2:?“ L0 4 I aborify rite ounfiramre charac‘re'isfics of accourmhg infer-Marion. mmsruwm an r 2?: L0 4 Idenrjfir the Mfirarive characteristics of accounfing informaffan, Thild levei Second level Iiiustrarian 277 Canceyruui meewnl‘k for Finmiul Reporting First level £0 4 Identify The qualimtive chamderisfk: of accounflhg rhformafian. chm“ 247 Qualitative Characteristics “The FASB identified the Qualitative Characteristics of accounting information that distinguish better (more usefui) information from inferior (less useful) information for decision-making purposes." “:55" 1.0 4 Identify the Miami: chmmrmm of accmnfing informafion. Understandability A company may present highly relevant and reliable information, however it was useless to those who do not understand it. CM 251;” L0 4 Identify the quafirari've character-isn't: of accoum‘ng infannAf-‘bn. Primary Qualities: Relevance — making a difference in a decision. I Predictive value I Feedbackvalue D Timeliness Reliability I Verifiable I Representational faithfulness I Neutral - free of error and bias In one prugosed converged omeepiml framework, reliability wm he repeces with "Iaifl-tiul leptmnlalion' as me Dflfiie pdmaty qualitative chin!!! chammfics mal musl he maenl fut anDlmaliDn It! be ' 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 “2:331“ L0 4 Idewrfffy flag qualfiaflvg cbmmriflics of accolmhhg informatfmci Third lave} Second Ievel mutt-Mien 2.? Conceptual Framework in Financial Reporting First level L0 4 Identffi’ the qualitative characteristics of accountrhg Information. Chaplet 2720 Secondary Qualities: Comparability - Information that is measured and reported in a similar manner for differentr companies is considered comparable. Consistency - When a company applies the same accounting treatment to Similar events from period to period. on i 2:151 u L0 4' Identify the quaffmnw characteristic: of accmfiry infmafiom Second level Illustration 2—? Conceptual szm for Financial Reparimg Firsl level L0 5 Define the basic efement: cf fibuncr'af mfeffleflfs. Chapler 2-2: 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. lammmm False Chaptel _ _ _ _ _ , , 2.2: L0 4 Identify the quairmflve characteristics of accommry information. Concepts Statement No. 6 defines ten interrelated elements that relate to measuring the performance and financial status of a business enterprise. "Period of Time" Investment by owners Distribution to owners Comprehensive income Revenue Expenses Gains a Losses ‘23:" LG 5 Define the basic elements of financial Wremnfs. “Moment-in Time" a Assets 3 Liabilities 9 Equity Exercise 2-3: Identify the element or elements associated Exercise 2—3: Identify the element or elements associated with items below. Elements with items below. Elements (a) AriSeS from peripheral or _ Assets {'0 Items characterized by Assets .3 3. tnctdental transactions. E Liabilities future economic benefit. . Liabilities 03) Obligation 1° transfer Equity {9) Equals increase in net Equity resources arising from a . assets during the year, post transaction. _ _ Investment by owners after adding distributions Investment by owners (c)Increoses ownership ’ .. '. Distribution to owners to owners and subtracti Distribution to owners interest. j- '1j Comprehensive income investments by owning .. ' Comprehensive income (d) Declares and Pat's C65?! Revenue (h) Arises from income Revenue dividends T0 owners. Expenses statement activities that Expenses (e) Increases in net assets in a . . . Gains constitute the entity's Eains period from nanawner ‘ ongoing major or central ’3 Losses - Losses sources. . . o emotions. Chg-i" La 5 a??? P La 5 Exercise 2—3: Identify the element or elements associated with items below. Elements REVIEW: (i) Residual interest in the net Assets l According to the FASB conceptual framework, on assets of the enterprise. (j) Increases assets through sale of product. (k) Decreases assets by ' purchming the com n 's own stock. I (I) Changes in equity during the period, except those from investments by owners and distributions to owners. Losses n c £7!" _"l’— L0 5 CE?" [.0 5 Define the basic efcmem of financial statements. , Equity a. A decrease in an asset from primary operations. ' Investment by owners . b. An increase in an asset from incidental Distribution to owners 1‘ transactions. c. An increase in a liability from incidental transactions. @ A decrease in a liability from primary operations. mommies l entity's revenue may result from i 1 Comprehensive income Revenue Expenses Gains (CPA adapted) The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. 5, _ _ "Recognition and Measurement in Financiai Statements separate from Its owners and other basmesses, of Business Enterprises." Economic Entity — company keeps its activity Going Concern - company to iast long enough to fulfiil objectives and commitments. Monetary Unit - money is the common denominator. Periodicity - company can divide its economic activities into time periods. ”13;" L0 6 Describe the basic estimation: of accounting. 522;" L0 6 Describe the basic ummpfiafls of accounting Brief Enercise 2~4= Identify which basic assumption of Measurement - The most commonly used measurements accounting is best described in each Item below. are based on historical cost and fair value. (a) The economic activities of KC Corporation are divided into 12-month periods for The purpose of issuing annual reports. Issues: D Historian? cost provides a reliable benchmark for measuring historical Trends. (b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. (c) Walgreen Co. reports current and nonwrrent classifications in its balance sheet. a Fair value information may be more usefui. D Recently the-FASB has taken the step of giving companies The option to use fair value as the basis for (d) The econgmic activities of 52mm; Elgc‘h-iic measurement of financial assets and financial liabilities. and its Subsidiaries are merged for accounting and reporting purposes. 522:” L0 6 Describe the basic aswmpfions of accounfii'y. c2221“ [0 7 51:01am the appficahbn of the basic principles of accounfing. 3 Reporting of fair value information is increasing. Revenue Recognition - generally occurs (1) when Expense Recognition - “Let the expense follow the reaiized or realizable and (2) when earned. revenues." Exceptions: Iz‘lustmtion 2,4 Timing-1f Revenue Recognition Chapter 2-5: [.0 7 Erpfaia the applitai‘r’on of the basic far-mangle: of amounting, CW' [.0 7' Erpfer'n the appncefion of the basic principle: of mutating. Brief Exercise 2*5: identify which basic principle of accounting is best described in each iTem below. (a) KC Corporation reports revenue in its income statement when it is earned instead of when The cash is collected. Fuil Disciosure ~ providing information That is of Sufficient importance To influence The judgment and decisions of an informed user. Provided through: . . (b) Yahoo, Inc. recognizes depreciation expense for D Fmancml S‘l’cl‘iel'l'lam'S a machine over The Zeyear period during which that 9 Notes To the Financiai Statements mama helps “'3 company gum revenue' _ _ (c) Oracle Corporation reports information about a Supplementary information 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. L0 7 Exphin The appb‘ca rm of the basic printable: of accwati'rg] cm“ [ .——-———“—_—_—'- . M ”“1“" l to P Explain the appi'icaflm of the bad: princqplas of unanimity. «s G’i’x "a I}; Cost Benefit - the cost of providing the information Brief Exercise 2—7: What accounting constraints are must be weighed against the benefits that can be iliustruted by the items below? derived from using it. (a) KC, Inc. reports agricultural crops on its Materiality - an item is material if its inclusion or balance Shea “T mark‘fi "alue' omission would influence or change the judgment of (b) Rafael Corporation does not accrue a a reasonable person. contingent lawsuit gain of $650,006. Industry Practice - the peculiar nature of some (C) Willis ComPflnY does 110* diSCIDSB any information in the notes to the financial statements unless the value of the information to users exceeds the expense Conservatism- when in doubt, choose the solution 9f gathering ”- that wiil be least likely to overstate assets and (d) Fayre Corporation expenses 111,3 005+ of income. _ 1 . wastebaskets in the year they are acquired. chapiu L0 3 Describe the impact that constraints have ChinEl 2-" an reporting occwnfiry information. zoo L0 5 industries and business concerns sometimes requires departure from basic accounting theory. Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted .15... .'. . in Section 117 of the 1976 United States Copyright Act without > The existing conceptual frameworks underlying 0.5. 6AA? and The 3"Press wrlfie'“ permission 0f the Garnish? owner is iGAAF are very similar, unlawful. Request for further information should be addressed } to the Permissions Department, John Wiiey 6: Sons, Inc. The The converged framework should be a singie document, unlike the ‘ , mu conceptual fmmmrks that [1,125sz exist. purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. > The 1,458 framework makes two assumptions. One assumption is that financial statements are prepared on an accrual basis: the other is that The reporting entity is a going concern. > There is some agreement that the role of financial reporting is to assist users in decision making. However, others note that another objective is to provide information on management‘s performance, Shayla! often referred to as stewardship. Chaplet 243 2110 ...
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