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ACC 414 (25)
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Lecture

Chapter 2

5 Pages
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Department
Accounting
Course Code
ACC 414
Professor
Amy Aubin

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Ch 2 Conceptual Framework Underlying Financial Reporting
Usefulness of Conceptual Framework
- Creates standards for accounting profession
- /v(]vv]ouvµ[understanding of & confidence in financial reporting
- Enhances comparability of financial statements of different companies
Conceptual Framework
Objectives
To provide info that is: useful to users & decision relevant
Fundamental Qualitative Characteristics
1. Relevance t makes a difference, has predictive/feedback value
2. Representational Faithfulness (Reliability) t complete, neutral, reasonably free from error/bias
x Completeness t include all info necessary to portray underlying events & transactions
x Neutrality t favor one set of stakeholders over another
x Freedom from material error/bias t reliable, convert economic events into f/s
Predictive value t use info to assess future potential of entity
Confirmatory/Feedback value t users use info to confirm their prior expectations & to assess
management performance
Enhancing Qualitative Characteristics
1. Comparability
x Info measured & reported in similar way (company to company, & year to year)
x Allows users to identify real economic similarities & differences
2. Verifiability t similar results achieved if same methods are used
3. Timeliness t info available to decision makers before lose ability to influence
4. Understandability
x Users need to have reasonable knowledge to see significance of info
x W}À]^enough_]v(}}Z]]o
5. Trade-offs t identify all relevant info, presented to reflect economic substance (representational
faithfulness)
6. Constraints t materiality t ]u]u}v(]u[}Àoo(]vv]o}]}v
Basic Elements
Balance Sheet
- Assets t present economic resource, right of access to those resources where others do not
o Economic resources t scarce & capable to produce cash flows, enforceable right (access)
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o Unconditional right t e.g. recover insured losses, even no loss suffered
o Conditional right t e.g. receive compensation if loss occurs
- Liabilities t economic obligation, entity has present obligation (enforceable)
o Stand-ready obligation t unconditional, ready to do whatever required under terms
o Constructive obligation t arise through past/present, acknowledging potential
economic burden
- Equity/Net Assets t residual (ownership) interest; assets t liabilities = net worth
Statement of Comprehensive Income Statement
- Revenues: ]v]v}v}u]}µU(}uvv]Ç[ordinary activities
- Expenses: ]v}v}u]}µU(}uvv]Ç[ordinary activities
- Gains: increases in equity (net assets) from incidental transactions
- Losses: decreases in equity from incidental transactions
- Comprehensive income t v]v}uoo}Zµ]ÇZvPÆ}Áv[]vÀuv
distributions
- Other comprehensive income: above elements that are included in CI, but not in NI
- Revenues t Expenses + Gains t Losses = Net Income ± OCI = Comprehensive Income
Foundational Principles
- Foundational concepts & constraints help explain which, when, & how financial elements and
events should be recognized/derecognized, measured, and presented/disclosed
- Act as guidelines for developing rational responses to controversial financial reporting issues
Recognition/Derecognition
Measurement
Presentation & Disclosure
1. economic entity
2. control
3. revenue recognition & realization
4. matching
5. periodicity
6. monetary unit
7. going concern
8. historical cost
9. fair value
10. full disclosure
Recognition
Process of including v]u}vv]Ç[ovZ}]v}uuv~
Elements of financial statements have historically been recognized when:
± they meet definition of an element (e.g. asset)
± they are probable, &
± they are reliably measurable
Derecognition t W}}(Zremoving[}uZ]vP(}uZovZ}]v}uuv
Economic Entity Assumption (Entity Concept)
economic activity can be identified with a particular unit of accountability
business activity is separate & distinct from its owners (& any other business unit)
An individual, departments or divisions of an entity, or an entire industry may be considered
separate entities
Does not necessarily refer to a legal entity
For tax & legal purposes, considered a legal entity
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Description
Ch 2 Conceptual Framework Underlying Financial Reporting Usefulness of Conceptual Framework - Creates standards for accounting profession - L ZZ]LL ]oZKLZZ[understanding & confidence in financial reporting - Enhances comparability of financial statements of different companies Conceptual Framework Objectives To provide info that is: useful to users & decision relevant Fundamental Qualitative Characteristics 1. Relevance J makes a difference, has predictivefeedback value 2. Representational Faithfulness (Reliability) J complete, neutral, reasonably free from errorbias N Completeness J include all info necessary to portray underlying events & transactions N Neutrality J favor one set of stakeholders over another N Freedom from material errorbias J reliable, convert economic events into fs Predictive value J use info to assess future potential of entity ConfirmatoryFeedback value J users use info to confirm their prior expectations & to assess management performance Enhancing Qualitative Characteristics 1. Comparability N Info measured & reported in similar way (company to company, & year to year) N Allows users to identify real economic similarities & differences 2. Verifiability J similar results achieved if same methods used 3. Timeliness J info available to decision makers before lose ability to influence 4. Understandability N Users need to have reasonable knowledge to see significance of info N 9}]Z^enough _]L}Z}Z]]Z o 5. Trade-offs J identify all relevant info, presented to reflect economic substance (representational faithfulness) 6. Constraints J materiality J ]K]K }L]K[Z}oo]LL ]o}]}LZ Basic Elements Balance Sheet - Assets J present economic resource, right of access to those resources where others do not o Economic resources J scarce & capable to produce cash flows, enforceable right (access) www.notesolution.com
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