Management and Organizational Studies 1023A/B Lecture Notes - Lecture 2: Conceptual Framework, Financial Statement, Income Statement
2 Oct 2018
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MOS1023 Week 2 (January 23rd, 2018)
Concept:
• The “why” behind accounting
• Conceptual defined: relating to or based on mental concepts
• Conceptual framework: involves concepts
• Helps organize concepts that are important
Conceptual framework:
• Conceptual framework is very important in financial accounting
• It can lead to consistent standards
• It prescribes the nature, function and limits or financial accounting and
financial statements
• Helps prevent accounting standards
• Ex. Enron
Usefulness of Conceptual Framework:
• The framework is like a constitution (it is a
coherent system of interrelated objectives)
• Aids in creation of standards for the
accounting profession
• Increases financial statement users
understanding of an confidence in financial
reporting
• Enhances comparability of financial
statements of different companies
Objectives of the conceptual framework:
• The framework is the foundation for building a set of accounting concepts
and objectives
• The framework is a reference of basic accounting theory for solving new and
emerging practical problems of reporting
Objective of financial reporting:
• True blood committee (1970’s)
• The overall objective of financial reporting is to provide information that is
useful to users such as investors and creditors
• Provide decision relevant information
Fundamental Qualitative characteristics:
1. Relevance
• Information makes a difference in a decision
• Three things it should have: predictive value feedback value and materiality
• It has predictive and feedback/confirmatory value
• Helps predict the future as well as confirm my prior beliefs
• Includes all material information (i.e. information that makes a difference to
the decision-maker)
• Anything that’s material has to be included
• Both quantitative and qualitative factors must be considered in determining
whether an item is material
• Qualitative factors may include illegal acts, failure to comply with regulations
or inadequate or inappropriate description of an accounting policy
• Typically the more relevant the info is the less reliable the info is and vice
versa
2. Representational Faithfulness or reliability
• Reflects he underlying economic substance of an event or transaction
• It must be:
• Complete (want the full period)
• Should include all necessary information to portray the underlying events
and transitions
• Neutral
• Information cannot favor one party over another
• Management best estimate: when companies must use their best estimate of
the about of revenue that will realized or eventually collected
• Free from material error
• Not human error simply material error (the significance of the error) e.g.
difference between minus 2 and 4 vs. difference between 10 and minus 4
• Substance over form
• Don’t care about legality of the contract rather the economic substance of
that transaction
Enhancing Qualitative Characteristics:
1. Comparability
• Information measured and reported in similar way (company to company,
and year to year)
• Allows users to identify real economic similarities and differences
• If you want a new policy you have to explain to investors the relevance of the
change
2. Verifiability
• Similar results achieved if same methods are used (consensus)
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MOS 1023A/B Full Course Notes
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