CACC 100 CH02

CACC 100 CH02 - CACC100 CH02 Conceptual Framework of...

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CACC100 CH02 Conceptual Framework of Accounting It guides: 1. the choice of what to present in financial statements 2. decisions about alternative ways of reporting economic events 3. selection of appropriate ways of communicating this information 4 Main Sections: 1. objective of financial reporting 2. qualitative characteristics of accounting information 3. elements of financial statements 4. recognition and measurement criteria Measurement criteria: Assumptions Principles Constraints Conceptual Framework Section 1: Objective of Financial Reporting Provide useful information for decision making Communicate information that is useful to external users: investor, creditors, and other users Conceptual Framework Section 2: Qualitative Characteristics of Accounting Information Information that are useful have the following characteristics: (1) Understandability, (2) Relevance, (3) Reliability, (4) Comparability Qualitative Characteristic 1: Understandability Financial information cannot realistically satisfy the varied needs of all users. Consequently, the objective of financial reporting focuses mostly on the information needs of investors and creditors. Therefore it is necessary to agree on a base level of understandability that will help both the preparer of financial information and its users. Understandability Assumption: The average user is assumed to have a reasonable understanding of accounting concepts and procedures, as well as of general business and economic conditions. Qualitative Characteristic 2: Relevance Accounting information has relevance if it will make a difference in a decision. Relevant information has one or all of the following: 1) Predictable value – helps users forecast future events 2) Feedback value – confirms or corrects prior expectations 3) Timely – it must be available to decision-makers when it can still influence decisions Qualitative Characteristic 3: Reliability The Accounting information is objective if it is reliable and dependable. That is two or more people reviewing the same information would reach the same results or similar conclusions and it is: 1) Verifiable It can be prove to have no errors and bias
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CACC100 CH02 2) A Faithful representation – legal form of the trnx 3) Neutral It cannot be selected, prepared, or presented to favor one set users In situations of uncertainty, neutrality is effected by the use of conservatism Conservatism – It means: When preparing its financial statement, a company should choose the accounting method that will be least likely to overstate assets and earnings. It does not mean: A company should intentionally understate its assets and earnings Qualitative Characteristic 4: Comparability Results when company with similar circumstances use the same accounting principles Information is comparable if it is consistent , that is the company’s financial information uses the
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This note was uploaded on 03/27/2012 for the course ACC 100 taught by Professor Unknown during the Spring '08 term at Ryerson.

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CACC 100 CH02 - CACC100 CH02 Conceptual Framework of...

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