Chapter 2.docx

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University of Toronto Scarborough
Financial Accounting
Douglas Kong

Chapter 2 The Conceptual Framework Objective of financial reportingTo provide useful economic information to external users for decision making and for assessing future cash flows. Fundamental (to be useful) • Relevancy: makes a difference in a decision, predictive value, feedback/confirmatory value • Faithful representation: complete, neutral, reasonably free from error or bias. Enhancing (degrees of usefulness) • Comparability: across companies. • Verifiability: similar results under independent measures. • Timeliness: information must be available before its loses its usefulness. • Understandability: allows reasonably informed users to see the significance of the information. Separate entity – business transactions are separate from the transactions of the owners Unit of measure assumption – accounting information should be measure and reported in the national monetary unit Continuity assumption (going concern) – businesses are assumed to continue to operate into the foreseeable future Cost Principle – requires assets to be recorded at the historical cash equivalent cost, meaning, cash paid plus the current monetary value of all non-cash considerations. Eg: if you pay $15,000 cash and give a laptop worth $2000 to buy a car, the cost of the asset that should be recorded is $17,000. A disadvantage of the cost principle is that assets always need to be recorded at the cost it was purchased for instead of the market value so if the cost of land is much higher than when it was purchased, the viewers of financial statement will not know. We cannot record it at current market price because each individual may think that the asset is worth more than what others think Assets are listed in order of liquidity (how quick they can be turned to cash) and liabilities are listed in ord
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