Chapter 2: The Conceptual Framework

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Chapter 2: The Conceptual
Framework

Intermediate Accounting, 11th Edition

Kieso, Weygandt, and Warfield


1.
Describe the usefulness of a conceptual
framework.

2.
Describe the FASB's efforts to construct a
conceptual framework.

3.
Understand the objectives of financial
reporting.

4.
Identify the qualitative characteristics of
accounting information.

After studying this chapter, you should be able
to:

Chapter 2: The Conceptual
Framework


5.
Define the basic elements of financial
statements.

6.
Describe the basic assumptions of accounting.

7.
Explain the application of the basic principles
of accounting.

8.
Describe the impact that constraints have on
reporting accounting information.


Chapter 2: The Conceptual
Framework


The Framework was to be the
foundation for building a set of
coherent accounting standards and
rules.


The Framework is to be a reference of
basic accounting theory for solving
emerging practical problems of
reporting.

Objectives of the Conceptual
Framework


The FASB has issued seven

Statements of
Financial Accounting Concepts

(SFACs) to
date (Statements 1 through 7.)


These statements set forth major
recognition and reporting

issues.


Statement 4 pertains to reporting by
non
-
business

entities.


The other six statements pertain to
reporting by
business

enterprises.

Statements of Financial
Accounting Concepts


Statement 1




Statement 2



Statement 6




Statement 4




Statement 5




Statement 7


Objectives of Financial
Reporting (Business)


Qualitative
Characteristics


Elements of Financial
Statements (replaces 3)


Objectives of Financial
Reporting (Non
-
business)


Recognition and
Measurement Criteria


Using Cash Flows

Brief Title

Statement

Statements of Financial
Accounting Concepts

The Framework has three different
levels,comprised of:


The first level consists of
objectives
.


The second level explains financial
elements
and
characteristics of information
.


The third level incorporates
recognition and
measurement criteria
.

Overview of the Conceptual
Framework

Conceptual Framework for
Financial Reporting

To provide information:


about economic resources, the claims on
those resources and changes in them.


that is useful to those making investment
and credit decisions.


that is useful to present and future
investors, creditors in assessing future cash
flows.


to individuals who reasonably understand
business and economic activities.


Basic Objectives of Financial
Reporting

Hierarchy of Accounting Qualities


Primary qualities of accounting information
are
relevance

and
reliability
.


Secondary qualities are
comparability

and
consistency

of reported information.

Qualitative Characteristics of
Accounting Information


Relevance

of information means information

c
apable of making a difference in a decision
context.”


Ingredients of relevant information are:


Timeliness


Predictive value


Feedback value

Primary Characteristic of
Accounting Information:
Relevance

Information is
reliable

when it can be relied on
to represent the true, underlying situation
.


The ingredients of reliable information are:


verifiability


representational faithfulness


neutrality (unbiased)




Primary Characteristic of
Accounting Information:
Relevance

Comparability
: the similar measurement and
reporting for different enterprises.


Consistency
: application of the same
accounting treatment to similar events by an
enterprise period to period.

Secondary Characteristics of
Accounting Information


Assets


Liabilities


Equity


Investment by
Owners


Distributions
to Owners


Comprehensive
Income


Revenues


Expenses


Gains


Losses


Basic Elements of Financial
Statements

Basic

Assumptions

1.
Economic


entity


2.
Going




concern


3.
Monetary




unit

4.
Periodicity

Principles

1.
Historical
cost

2.
Revenue


recognition

3.
Matching

4.
Full


disclosure

Constraints

1.
Cost benefit

2.
Materiality

3.
Industry




practices

4.
Conservatism

Recognition and Measurement
Criteria

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