Conceptual Framework of Accounting

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The definition of the conceptual framework is?: A coherent system of interrelated objectives and fundamentals that can lead to consistent standards that prescribe the nature, function, and limits of financial accounting and financial statements.
Definition of (SFAC) STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS 1: Objectives of Financial Reporting by Business Enterprise -presents the goals and purposes of accounting
Definition of (SFAC) STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS 2: Qualitative Characteristics of Accounting Information -examines the characteristics that make accounting information useful.
Definition of (SFAC) STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS 3: Elements of Financial Statements of Business -provides definition of items in financial statements, such as assets, liabilities. revenues, and expenses.
Definition of (SFAC) STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS 5: Recognition and Measurement in Financial Statements of Business Enterprises -Sets forth fundamental reognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when.
Definition (SFAC) Statements of Financial Accounting Concepts 6: Elements of Financial Statements -replaces SFAC No. 3 and expands it's scope to include not-for-profit organization.
Definition (SFAC) Statements of Financial Accounting Concepts 7: Using Cash Flow Information and Present Value in Accounting Measurements -provides a framework for using expected cash flows and present values as a basis of measurement.
What are the 3 levels that compose the Conceptual framework?: Level 1) Basic Objective (goals and purposes of accounting)
Level 2) Fundamental Concepts (the bridge between)
Level 3) Recognition and Measurement Concepts (implementation of these goals and purposes)
Level 1) Basic Objective of the Conceptual framework is what?: To provide useful information that is 1) useful to those making investment and credit decision who have a reasonable understanding of business and economic activities
2) helpful to present and potential investors, creditors, and other users in assessing the amounts, timing, and incertainty of future cash flows and 3) about economic resources, the claims to these resources and changes in them.
Choosing an acceptable accounting method, the amount and types of information to be disclosed, and the format in which information should be presented involves determining which alternatives provides the most useful information for decision making purpos: Decision Usefulness
What does the qualitative characteristics of accounting do?: It distinguishes accounting information from better/more useful information from inferior/less useful information for decision making purposes.
Define understandability: Quality of information that permits reasonably informed users to perceive its significance.
What are the 2 primary qualities that make accounting information useful for decision making.: 1) Relevance and
2) Reliability.
Primary quality 1) Relevance: Accounting information must be capable of making a difference in a decision. For information to be relevant it should have predictive or feedback value, and it must be presented timely
Predictive Value is..: Characteristic of Relevance. It is when accounting information helps users to make predictions about the ultimate outcome of past, present, and future events.
Feedback Value is..: relevant information that helps users confirm or correct prior expectations.
Timeliness is..: when information is available to decision makers before it loses it's capacity to influence their decisions. It's required for information to be relevant.
Primary Quality 2) Reliability: Accounting information is reliable to the extent that it is verifiable, is a faithful representation, and is reasonably free of error and bias.
It is necessary for individuals who have neither the time nor the expertise to evaluate the factual content of the information
Verifiability is..: demonstrated when independent measurers, using same measurement methods, obtain similar results.
Representational Faithfulness means..: the numbers and descriptions represent what really existed or happened and therefore are reliable.
Neutrality means..: information cannot be selected to favor one set of interested parties over another. Factual, truthful, unbiased unformation must be the overriding consideration
What are the secondary qualities of accounting information?: 1) comparability
2) consistency
Secondary Quality 1) comparability: Information that has been measured and reported in a similar manner for different enterprises is considered comparable.
Secondary Quality 2) consistency: When an entity applies the same accounting treatment to similar events, from period to period, the entity is considered to be consistent in its use of accounting standards
1) Users of Accounting Information 2) Constraints 3) User-Specific Qualities 4) Persuasive Criterion 5) Primary Qualities 6) Ingrediants of Primary Qualities 7) Secondary Qualities: 1) Decision Makers and their characteristics
2) -Cost<Benefits (Pervasive restraint)
-Materiality (Threshold for recognition)
3) Understandability
4) Decision Usefulness
5) -Relevance -Reliability
6) -Predictive Value, Feedback Value, Timeliness
-Verifiability, Representational Faithfulness, Neutrality
7) -Comparability, -Consistency
What are the basic elements that describe the -amounts of resources and -claims to resources at a moment in time?: Assets, Liabilities, and Equity
Define Assets..: probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
Define Liabilities..: probable future sacrifices of economic benefitsarising from persent obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
Define Equity..: Residual interest in the assets of an entity that remains after deducting it's liabilities. In a business enterprise, the equity is the ownership interest.
What basic elements describe the transactions, events, and circumstances that affect an enterprise during a period of time?: Investments by Owners, Distributions to owners, Comprehensive income, revenues, expenses, gains, losses
Investments by owners is defined as..: Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain an increase ownership interests (or equity) in it. Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise.
Distributions to owners is defined as..: Decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. Distributions to owners decrease ownership interests (or equity) in an enterprise
Comprehensive income is defined as..: changes in equity (net assets)of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Revenues is defined as..: Inflows or other enhancements of assets of an entity or settlement of it's liabilities (or a combination of both) during a period form delivering or producing goods, rendering services, or other activities that consitute the entity's ongoing major or central operations.
Expenses is defined as..: Outflows or other using up assets or incurrences of liabilities (or a combination of both) during a period from delievering or producing goods, rendering services, or carrying out other activities that constitue the entity's ongoing major or central operations.
Gains is defined as..: Increases in equity (net assets) from peripheral or incidential transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners
Losses is defined as..: Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.
Articulation is the interaction of..: assets, liabilities, and equity is changed by elements of the other basic elements (ex. investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses) amd at amu time is the cumulative results of all changes. Key figures in one statement corresponds to balances in another
Third Level: Recognition and Measurement: Implements the basic objectives of level one. Descibes which, when, and how financial elements and events should be recognized, measured, and reported by the accounting system as set forth in SFAC 5.
According to SFAC 5 to be recognized...: an item, event, or transaction, must meet the definition of an "element of financial statements" (as defined in (SFAC 6)and must be measurable.
What are the 4 assumptions that underlie the financial accounting structure?: 1) economic entity
2) going concern
3) Monetary Unit
4) Periodically
1) economic entity assumption: economic activity can be identified with a particular unit of accountability, meaning, the activity of a business enterprise can be kept separate and distinct from its owners and any other business unit.
2) going concern assumption: The business enterprise will have a long life (enough to fufill their objectives and commitments).
3) Monetary Unit assumption: money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. Implies that the monetary unit is the most effective means of expressing to interested parties changes in capital and exchanges of goods and services.
4) Periodically (time period) assumption: Implies that the economic activities of an enterprise can be divided into artifical time periods. The most common are monthly, quarterly, and yearly.

NOTE: the shorter the time period, the more difficult it is to determine net income for the period. Results for a month is less reliable then a quarter and so on. However, product cycles are becoming shorter. Thus is the trade-off between relevance and reliability in preparing financial data.
What are the 4 prinicples of accounting used to record transactions?: 1) Historical Cost
2) Revenue Recognition
3) Matching
4) Full Disclosure
1) Historical Cost Principle: 1) The advantage of historical cost over other valuation methods is that it is reliable.
Assets=Cost
Liabilities=Exchange Price
However, we use a "mix attribute" system where debt and equity securities are reported at Fair Market Value, receivables are reported at Net Realizable, and inventories are reported at the lower of cost or market.
2) Revenue Recognition Principle: Revenue should be recognized when 1) realized or relizable
and 2) earned.
Revenue is realized when..: products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash.
Revenue is realizable..: when assets received or held are readily convertible into cash or claims to cash.
Revenue is considered earned..: when the entity has substantially accomplished what it must do to be entitled to benefits represented by the revenues.

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Number of cards 51