ACC 310 Chapter 2 Flashcards

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Questions and Answers

Why do accountants sometimes find it necessary to be conservative in financial reporting?

To avoid overstating net assets and net income when these amounts are uncertain.

What is conservatism in accounting?

An approach to avoid overstating net assets and net income when valuations are uncertain.

Describe the financial reporting model within the FASB Conceptual Framework.

It includes all of the financial statements, Notes to the statements, supplementary information, and other means of financial reporting.

What are the primary sources of useful information identified in the financial reporting model?

The 5 financial statements, the Notes, and supplementary information. Signup and view all the answers

What is the Conceptual Framework of the FASB?

The FASB Conceptual Framework is a theoretical foundation of interrelated objectives, concepts, principles, and definitions that enable the establishment and application of consistent financial accounting standards. Signup and view all the answers

What is the purpose of the FASB's Conceptual Framework?

To guide the FASB in establishing accounting standards, establish concepts for financial statement preparers, increase users' understanding, and enhance financial statement comparability. Signup and view all the answers

How do accounting concepts, principles, standards, and rules differ?

Concepts Statements and principles are broad and definitional, standards are authoritative statements that comprise GAAP, and rules are specific procedures within accounting standards. Signup and view all the answers

What do the FASB's Concepts Statements establish?

Fundamental principles of accounting, objectives of financial reporting, qualities of useful financial information, definitions of basic elements, types of economic transactions, and measurement attributes. Signup and view all the answers

What is the most general objective of financial reporting?

The primary objective is to provide financial information that is useful to existing and potential investors, lenders, and other creditors. Signup and view all the answers

List the reasons why external stakeholders use information about a company's economic resources.

To identify resources and obligations, to evaluate management's performance, and to predict future income and net cash inflows. Signup and view all the answers

Why should financial reporting provide useful information about the stewardship of company management?

It should inform how efficiently and effectively company management has discharged their responsibilities over the company's resources. Signup and view all the answers

Define return on investment.

Return on investment provides a measure of overall company performance for equity shareholders. Signup and view all the answers

What are the two primary qualities of useful accounting information?

Relevance and faithful representation. Signup and view all the answers

What is relevant accounting information?

Accounting information is relevant if it is capable of making a difference in decisions made by financial statement users. Signup and view all the answers

What is materiality, and how does it relate to relevance?

Materiality refers to the nature and magnitude of an omission or misstatement that would influence a reasonable person's judgment. Signup and view all the answers

What is faithfully represented accounting information?

It accurately depicts the underlying economic transactions and must be complete, neutral, and free from error. Signup and view all the answers

Identify the enhancing characteristics of useful accounting information.

Comparability, verifiability, timeliness, and understandability. Signup and view all the answers

Compare and contrast comparability and consistency.

Comparability allows users to identify differences between economic facts, while consistency means accounting methods are applied uniformly over time. Signup and view all the answers

What is the cost constraint?

The cost constraint limits the reporting of financial information to what is beneficial in relation to its preparation cost. Signup and view all the answers

What is the reporting entity assumption?

It states that a business enterprise is a distinct entity for which financial statements can be prepared. Signup and view all the answers

What is the going-concern assumption?

It assumes a company will continue to operate in the foreseeable future. Signup and view all the answers

What is the period-of-time assumption?

It states that companies prepare financial statements for specific time periods. Signup and view all the answers

Why does financial reporting utilize a mixed set of measurement attributes?

To provide users with the most relevant and faithfully represented measures. Signup and view all the answers

Discuss the relationship among historical cost, relevance, and faithful representation.

Historical cost is an important initial measure, but may lose relevance as economic values change. Signup and view all the answers

What is recognition in accounting?

Recognition is the process of formally recording and reporting an item in the financial statements based on specific criteria. Signup and view all the answers

Describe accrual accounting.

Accrual accounting measures and reports economic effects when they occur, not when cash is exchanged. Signup and view all the answers

What drives the timing of revenue recognition?

The revenue recognition principle determines when performances obligations are satisfied for recording revenue. Signup and view all the answers

What drives expense recognition?

The matching principle drives expense recognition by aligning expenses with the corresponding revenue. Signup and view all the answers

What is conservatism?

Conservatism is an accounting principle that advises caution in financial reporting to avoid overstating financial position. Signup and view all the answers

Study Notes

FASB Conceptual Framework

Provides a foundation for establishing and applying consistent financial accounting standards.
Guides standard setters, preparers, auditors, and users of financial statements.
Formed through various Concepts Statements issued by the FASB.

Purpose of the Conceptual Framework

Aids FASB in creating accounting standards.
Helps financial statement preparers and auditors resolve issues without existing standards.
Enhances understanding and confidence in financial reporting among users.
Promotes comparability of financial statements over time and across companies.

Accounting Concepts and Principles

Principles are fundamental theories supporting financial accounting.
Concepts Statements outline objectives and principles forming the base of GAAP.
Standards are authoritative applications of concepts to specific transactions.
Rules provide detailed procedures within accounting standards.

Concepts Statements Objectives

Set fundamental accounting principles and objectives.
Define qualities of useful accounting information.
Clarify definitions of basic elements like assets and liabilities.
Outline which economic transactions should be reported.

Financial Reporting Objectives

Aims to provide useful financial information for investors, lenders, and creditors for resource allocation decisions.
Defines users:
- Investors: equity holders and fund managers.
- Lenders: banks, bondholders, etc.
- Creditors: suppliers and employees with claims on the company.

Importance of Economic Information

Economic resources help assess liquidity and solvency.
Comprehensive income informs users about management's performance.
Cash flows are crucial for understanding a company’s ability to meet obligations.

Stewardship Information

Financial reporting should inform on management's efficiency in using company resources.
Management has stewardship responsibility to protect resources from risks.

Key Financial Metrics

Return on Investment (ROI): measures overall performance for equity shareholders.
Risk: the variability of future profitability affects investment decisions.
Financial Flexibility: ability to adapt to changes using financial resources.
Liquidity: ease of converting assets to cash for short-term obligations.
Operating Capability: efficiency in producing goods and services.

Qualities of Useful Accounting Information

Decision usefulness: main objective, achieved through relevance and faithful representation.

Characteristics of Relevant Information

Ability to influence decisions and predict future outcomes.
Contains predictive and confirmatory value.
Materiality is essential, as its significance can change based on context.

Faithful Representation

Information must accurately depict economic realities: complete, neutral, and free from error.
Completeness requires all necessary information for understanding.
Neutrality avoids bias, while being free from error reflects the best available insights.

Enhancing Characteristics of Information

Comparability: facilitates analysis of similar economic facts over time or between entities.
Verifiability: ensures that different observers reach a consensus on representations.
Timeliness: ensures information availability for decision-making.
Understandability: accessible to knowledgeable users willing to engage with the information.

Comparability vs. Consistency

Comparability allows for identifying similarities and differences across entities or periods.
Consistency involves applying the same accounting methods over time to achieve comparability.

Cost Constraint in Financial Reporting

Balances the benefits of provided information against the costs of preparation.
Ensures that disclosed information is both relevant and representationally faithful.

Reporting Entity Assumption

Assumes that a business is a distinct legal and economic entity for financial reporting.
Financial statements must reflect the specific activities of the reporting entity.

Going-Concern Assumption

Presumes that a company will continue operating in the foreseeable future, important for valuing assets and liabilities.

Period-of-Time Assumption

Financial statements reflect a specific accounting period, commonly annually or aligned with the business cycle.

Mixed Measurement Attributes

Uses a mixture of measurement attributes to enhance relevance and faithful representation in financial reporting.

Historical Cost and Relevance

Historical cost serves as a relevant measure at transaction time but may lose relevance if economic conditions change; alternative valuation methods may be required.

Recognition in Accounting

Formal recording of items in financial statements requires meeting specific criteria: definition of element, measurability, relevance, and representational faithfulness.

Accrual Accounting

Measures economic effects of transactions when they occur, regardless of cash flow timing.
Objectives include accurately reflecting financial position and performance.

Revenue and Expense Recognition

Revenue is recognized when performance obligations are met.
Expenses are recognized based on matching principles or systematic allocation.

Conservatism Principle

Aims to prevent overstating assets and income under uncertainty; chooses the least optimistic valuation in ambiguous situations.

Financial Reporting Model

Comprises financial statements, notes, supplementary information, and other reporting means.

Sources of Useful Information

Identified sources include five financial statements, notes, and supplementary information for comprehensive reporting.

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Description

Test your knowledge of the FASB Conceptual Framework with these flashcards. This chapter outlines the essential objectives and principles that shape financial accounting standards. Ideal for students of accounting looking to reinforce their understanding and application of these concepts.