CHAPTER 2 TEXTBOOK REVIEW An 8 page summary of the entire second chapter of the RSM220 textbook (Intermediate Accounting)

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Department
Rotman Commerce
Course
RSM220H1
Professor
Dragan Stojanovic
Semester
Winter

Description
CHAPTER TWO Conceptual Framework Underlying Financial ReportingConceptual Framework 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 statementsMany observers believe that the real contribution of standardsetting bodies and even their continued existence depends on the quality and usefulness of the conceptual frameworkRationale for Conceptual FrameworkTo be useful standard setting should build on an established body of concepts and objectives Having a soundly developed conceptual framework as their starting point standard setters are then able to issue additional useful and consistent standards over timeThe result is a coherent set of standards and rules as they have all been built upon the same foundationIt is important that such framework increase financial statement users understanding of and confidence in financial reporting and that it enhance the comparability of different companies financial statementsBy referring to an existing framework of basic theory it should be possible to solve new and emerging practical problems more quicklyBy using good judgment and with the help of a universally accepted conceptual framework it is hoped that accountants will be able to decide against certain alternatives quickly and to focus instead on a logical and acceptable treatmentDevelopment of the Conceptual FrameworkNo single framework has been universally accepted and relied on in practiceAt the first level the objectives identify accountings goals and purposes these are the conceptual frameworks building blocksAt the second level are the qualitative characteristics that make accounting information useful and the elements of financial statements assets liabilities equity revenues expenses gains and lossesAt the thirdfinal level are the foundational principles used in establishing and applying accounting standardsOBJECTIVE of financial reportingTo communicate information that is useful to investors creditors and other users in making their resource allocation decisions including assessing management stewardship about the economic resources and claims on them as well as the financial performanceFinancial statementsprovide information about the financial position changes in financial position and the entitys performanceThe accounting profession provides this information to users of financial statements through generalpurpose financial statementsThese are basic financial statements that give information that meets the needs of key usersThe statements are intended to provide the most useful information possible in a manner whereby benefits exceed costs to different kinds of usersThe objectives are about accountings goals and purposes Qualitative characteristics of useful informationChoosing 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 alternative gives the most useful information for decisionmaking purposesdecision usefulnessThe conceptual frameworks second level has identifies the qualitative characteristics of accounting information that distinguish information that is better ie more useful for making decisions from information that is inferior less usefulFundamental qualitative characteristicsoRelevance and representational faithfulness are fundamental qualities that make accounting information useful for decisionmaking
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