Intermediate_Accounting_Chapter02

Intermediate_Accounting_Chapter02 - 1460T_c02.qxd...

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Learning Objectives After studying this chapter, you should be able to: 1 Describe the usefulness of a conceptual framework. 2 Describe the FASB’s efforts to construct a conceptual framework. 3 Understand the objectives of financial reporting. 4 Identify the qualitative characteristics of accounting information. 5 Define the basic elements of financial statements. 6 Describe the basic assumptions of accounting. 7 Explain the application of the basic principles of accounting. 8 Describe the impact that constraints have on reporting accounting information. CHAPTER TWO The growth of new-economy business on the Internet has led to the development of new measures of performance. When Priceline.com splashed on the dot-com scene, it touted steady growth in a measure called “unique offers by users” to explain its heady stock price. To draw investors to its stock, Drugstore.com focused on the number of “unique customers” at its website. After all, new businesses call for new performance measures, right? Not necessarily. In fact, these indicators failed to show any consistent relationship be- tween profits and website visits. Eventually, as the graphs below show, the profits never materialized, and stock prices fell. The lesson here: Although the new economy may require some new measures, investors need to be careful not to forget the reliable traditional ones. 1 27 PRICELINE.COM Net unique offers by users 3.0 million 2.0 1.0 0 I II III 1999 IV I II III 2000 IV Stock price 2000-IV close $2.13 $120 a share 80 40 0 I II III 1999 IV I II III 2000 IV DRUGSTORE.COM Unique customers 2.0 million 1.5 1.0 0.5 0 I II III 1999 IV I II III 2000 IV Stock price 2000-IV close $1.03 $40 a share 30 20 10 0 I II III 1999 IV I II III 2000 IV 1 Story and graphs adapted from Gretchen Morgenson, “How Did They Value Stocks? Count the Absurd Ways,” New York Times (March 18, 2001), section 3, p. 1. CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING Show Me the Earnings!
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CONCEPTUAL FRAMEWORK FIRST LEVEL: BASIC OBJECTIVES SECOND LEVEL: FUNDAMENTAL CONCEPTS THIRD LEVEL: RECOGNITION AND MEASUREMENT • Need • Development • Qualitative characteristics • Basic elements • Basic assumptions • Basic principles • Constraints CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING As our opening story indicates, users of financial statements need relevant and reliable information. To help develop this type of financial information, financial accounting and reporting relies on a conceptual framework. In this chapter, we discuss the basic concepts underlying the conceptual framework, as follows. A conceptual framework is like a constitution : It is “a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements.” 2 Many consider the FASB’s real contribution to depend on the quality and utility of the con- ceptual framework.
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This note was uploaded on 04/04/2012 for the course ACC 422 taught by Professor Susan during the Spring '08 term at University of Phoenix.

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Intermediate_Accounting_Chapter02 - 1460T_c02.qxd...

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