Ch2 - Intermediate Accounting Intermediate Chapter 2...

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Unformatted text preview: Intermediate Accounting Intermediate Chapter 2 Conceptual Framework Underlying Financial Accounting Learning Objectives Learning 2 Describe the usefulness of a conceptual framework Describe the FASB’s efforts to construct a conceptual framework Understand the objective 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 constraints have on reporting accounting information Conceptual Framework Conceptual The Need for a Conceptual Framework To develop a coherent set of standards and rules To solve new and emerging practical problems A conceptual framework underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements. 3 LO 1: Describe the usefulness of a conceptual framework Development of Conceptual Framework Development The FASB has issued seven 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 of Business Enterprises (replaced by SFAC No. 6) SFAC No. 5 – Recognition and Measurement in Financial Statements of Business Enterprises SFAC No. 6 – Elements of Financial Statements (replaces SFAC No.3 ) SFAC No. 7 – Using Cash Flow Information and Present Value in Accounting Measurements SFAC No. 8 – C h a p te r 1 ­­O b je c tive o f g e n e ra l p u rp o s e fin a nc ia l re p o rting a n d C h a p te r 3 ­­Q ua lita tive c h a ra c te ris tic s of useful financial information replaces SFAC No. 1 and 2 4 LO 2: Describe the FASB’s efforts to construct a conceptual framework Conceptual Framework Conceptual The Framework is comprised of three levels: First Level = Basic Objective Basic Objective Second Level = Fundamental Concepts Fundamental Concepts Third Level = Recognition and Measurement Concepts 5 LO 2:Describe the FASB’s efforts to construct a conceptual framework Third Level Assumptions Principles Constraints 1. Economic entity 1. Measurement 1. Cost­benefit 2. Going concern 2. Revenue recognition 2. Industry practice 3. Monetary unit 3. Expense recognition 4. Periodicity 4. Full disclosure Qualitative Qualitative Characteristics Characteristics Relevance Faithful Representation Comparability Verifiability Timeliness Understandability Elements Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second Level Objective First Level 6 Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers. LO 2: Describe the FASB’s efforts to construct a conceptual framework First Level: Basic Objective First Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers. 7 LO 3: Understand the objectives of financial reporting Third Level Assumptions Principles Constraints 1. Economic entity 1. Measurement 1. Cost­benefit 2. Going concern 2. Revenue recognition 2. Industry practice 3. Monetary unit 3. Expense recognition 4. Periodicity 4. Full disclosure Qualitative Qualitative Characteristics Characteristics Elements Relevance Faithful Representation Comparability Verifiability Timeliness Understandability Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second Level Objective First Level 8 Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers. LO 2: Describe the FASB’s efforts to construct a conceptual framework Second Level: Fundamental Concepts Second 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.” 9 LO 4: Identify the qualitative characteristics of accounting information CAPITAL PROVIDERS (Investors and Creditors) AND THEIR CHARACTERISITICS Primary users of accounting information COST Constraint DECISION­USEFULNESS Pervasive criterion Fundamental qualities Ingredients of fundamental qualities RELEVANCE Predictive value FAITHFUL REPRESENTATION Confirmatory value Completeness Free from error Materiality Enhancing qualities 10 Comparability Verifiability Neutrality Timeliness Understandability Second Level: Qualitative Characteristics Second Fundamental Qualities: Relevance – making a difference in a decision Relevance making a difference in a decision Predictive value Confirmatory value Materiality Faithful Representation – means that the numbers and description 11 match what really existed or happened Completeness Neutrality Free from error Second Level: Qualitative Characteristics Second Relevance: 1. Predictive Value - Financial information has predictive value if it Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future. 2. Confirmatory Value – Financial information has confirmatory value if it helps users confirm or correct prior expectations. 3. Materiality – (A company specific aspect of relevance) Information is material if omitting or misstating it could influence decisions that users make on the basis of the reported financial information. 12 Second Level: Qualitative Characteristics Second Faithful Representation: 1. Completeness – Means that all the information that is necessary for Means that all the information that is necessary for faithful representation is provided. 2. Neutrality – Means that a company cannot select information to favor one set of interested parties over another. 3. Free from Error – An information item that is free from error will be a more accurate (faithful) representation of a financial item. 13 Second Level: Qualitative Characteristics Second Enhancing Qualities: 1. Comparability – Information that is measured and reported in a similar manner for Comparability Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency (another type of comparability) is when a company applies the same accounting treatment to similar events from period to period. 2. Verifiability – Occurs when independent measurers, using the same methods, obtain Occurs when independent measurers, using the same methods, obtain similar results. 3. Timeliness – Having information available to decision­makers before it loses its Timeliness capacity to influence decision. 4. Understandability – the quality of information that lets reasonably informed the quality of information that lets reasonably informed users see its significance. 14 LO 4: Identify the qualitative characteristics of accounting information Second Level: Basic Elements Second Concepts Statement No. 6 defines ten interrelated elements that relate to measuring the performance and financial status of a business enterprise. “Moment in Time” “Period of Time” • Assets Assets • Investment by owners Investment by owners •Liabilities •Equity •Distribution to owners •Comprehensive income •Revenue •Expenses •Gains •Losses 15 LO 6: Define the basic elements of financial statements Third Level Assumptions Principles Constraints 1. Economic entity 1. Measurement 1. Cost­benefit 2. Going concern 2. Revenue recognition 2. Industry practice 3. Monetary unit 3. Expense recognition 4. Periodicity 4. Full disclosure Qualitative Qualitative Characteristics Characteristics Relevance Faithful Representation Comparability Verifiability Timeliness Understandability Elements Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second Level Objective First Level 16 Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers. LO 2: Describe the FASB’s efforts to construct a conceptual framework Third Level: Assumptions Third Economic Entity – company keeps its activity separate from its owners and other businesses Going Concern – company to last long enough to fulfill objectives and commitments Monetary Unit – money is the common denominator Periodicity ­ company can divide its economic activities into time periods LO 6: Describe the basic assumptions of accounting Third Level Assumptions Principles Constraints 1. Economic entity 1. Measurement 1. Cost­benefit 2. Going concern 2. Revenue recognition 2. Industry practice 3. Monetary unit 3. Expense recognition 4. Periodicity 4. Full disclosure Qualitative Qualitative Characteristics Characteristics Relevance Faithful Representation Comparability Verifiability Timeliness Understandability Elements Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second Level Objective First Level 18 Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers. LO 2: Describe the FASB’s efforts to construct a conceptual framework Third Level: Principles Third Measurement – The most commonly used measurements are based on historical historical cost and fair value. cost Revenue Recognition – generally occurs (1), when realized or realizable, and (2), Revenue generally occurs (1), when realized or realizable, and (2), when earned Expense Recognition – “Let the expense follow the revenues” Expense “Let the expense follow the revenues” Full Disclosure – providing information that is of sufficient importance to influence Full providing information that is of sufficient importance to influence the judgment and decisions of an informed user 19 LO 7: Explain the application of the basic principles of accounting Third Level Assumptions Principles Constraints 1. Economic entity 1. Measurement 1. Cost­benefit 2. Going concern 2. Revenue recognition 2. Industry practice 3. Monetary unit 3. Expense recognition 4. Periodicity 4. Full disclosure Qualitative Qualitative Characteristics Characteristics Relevance Faithful Representation Comparability Verifiability Timeliness Understandability Elements Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses Second Level Objective First Level 20 Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers. LO 2: Describe the FASB’s efforts to construct a conceptual framework Third Level: Constraints Third Cost Benefit – the cost of providing the information must be weighed against the benefits that can be derived from using it Industry Practice – the peculiar nature of some industries and business concerns sometimes requires departure from basic accounting theory 21 LO 8: Describe the impact that constraints have on reporting accounting information ...
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This note was uploaded on 02/28/2012 for the course ACC 3313 taught by Professor Humphrey during the Spring '08 term at Texas State.

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