Intermediate Accounting Chapter 2
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Questions and Answers

What is defined as a present obligation of the entity arising from past events?

  • Income
  • Equity
  • Asset
  • Liability (correct)

What represents the residual interest in the assets of an entity after liabilities are deducted?

  • Asset
  • Liability
  • Equity (correct)
  • Income

Which of the following describes a decrease in economic benefits that results in a decrease in equity?

  • Income
  • Liability
  • Expense (correct)
  • Asset

Which characteristic is displayed when companies in the same industry use the same accounting principles?

<p>Comparability (C)</p> Signup and view all the answers

What type of income results from enhancements of assets or decreases of liabilities?

<p>Income (A)</p> Signup and view all the answers

Which of the following is NOT an element of financial statements?

<p>Cash flow (C)</p> Signup and view all the answers

Which element can be defined as increases in economic benefits during the accounting period?

<p>Income (D)</p> Signup and view all the answers

What signifies the inflows of resources that enhance an entity's economic benefits?

<p>Income (D)</p> Signup and view all the answers

What does confirmatory value refer to in accounting information?

<p>Information that aligns with users' earlier expectations (D)</p> Signup and view all the answers

Which of the following is a characteristic that enhances both relevance and faithful representation?

<p>Comparability (A), Materiality (C)</p> Signup and view all the answers

Which fundamental quality is compromised if a standard ignores economic consequences?

<p>Neutrality (D)</p> Signup and view all the answers

What is the importance of predictive value in accounting information?

<p>It helps users to anticipate future events (B)</p> Signup and view all the answers

What is an example of timeliness in the context of accounting?

<p>Production of interim reports (A)</p> Signup and view all the answers

What characteristic requires a consensus among individuals on specific measurements?

<p>Verifiability (A)</p> Signup and view all the answers

What is the primary purpose of a conceptual framework in financial reporting?

<p>To establish fundamental concepts that guide financial reporting. (A)</p> Signup and view all the answers

Which of the following is NOT a fundamental quality that makes accounting information useful for decision-making?

<p>Confidentiality (D)</p> Signup and view all the answers

Which of the following is NOT part of the development of the Conceptual Framework for financial reporting?

<p>Specific industry financial reporting requirements. (D)</p> Signup and view all the answers

What limitation occurs when an item is not reported because its effect on income is deemed immaterial?

<p>Challenges in understanding (D)</p> Signup and view all the answers

Which underlying assumption is included in the Conceptual Framework?

<p>Going concern assumption. (B)</p> Signup and view all the answers

What do qualitative characteristics of accounting information primarily aim to enhance?

<p>Relevance and reliability of the financial information. (D)</p> Signup and view all the answers

What is one of the basic principles involved in measuring elements of financial statements?

<p>Historical cost measurement. (C)</p> Signup and view all the answers

Which chapter of the Conceptual Framework addresses the qualitative characteristics of useful financial information?

<p>Chapter 3. (B)</p> Signup and view all the answers

Which of the following concepts is NOT included in the Framework for capital and capital maintenance?

<p>Human capital maintenance. (C)</p> Signup and view all the answers

What is a key benefit of having a conceptual framework for the IASB?

<p>To ensure consistency in the development of accounting pronouncements. (B)</p> Signup and view all the answers

What is the primary objective of providing financial information about the reporting entity?

<p>To be useful for decision-making by investors and creditors (B)</p> Signup and view all the answers

Who are the primary users of the financial information provided by the reporting entity?

<p>Present and potential equity investors, lenders, and other creditors (B)</p> Signup and view all the answers

What assumption is made about the users of financial statements?

<p>They have reasonable knowledge of business and financial accounting matters (C)</p> Signup and view all the answers

What distinguishes more useful accounting information from less useful information according to IASB?

<p>The qualitative characteristics of the information (B)</p> Signup and view all the answers

Which of the following is NOT a characteristic of general-purpose financial statements?

<p>They provide detailed information for specific users (D)</p> Signup and view all the answers

What role do qualitative characteristics play in accounting information?

<p>They determine how well the information can support decision-making (B)</p> Signup and view all the answers

What is the purpose of issuing general-purpose financial statements?

<p>To provide useful information for capital providers (D)</p> Signup and view all the answers

What is an assumption made about the nature of financial information users?

<p>They possess some knowledge of business and accounting (D)</p> Signup and view all the answers

What does the economic entity assumption imply about a company's financial activities?

<p>The company keeps its financial activities separate from its owners. (B)</p> Signup and view all the answers

Which assumption allows a company to divide its economic activities into specific time periods for reporting?

<p>Periodicity (C)</p> Signup and view all the answers

What does the going concern assumption imply about a company?

<p>The company is expected to continue its operations for the foreseeable future. (A)</p> Signup and view all the answers

Which principle is applied when recognizing revenue earned during a specific accounting period?

<p>Revenue recognition principle (B)</p> Signup and view all the answers

In terms of the monetary unit assumption, what is assumed about financial statements?

<p>They must use a stable currency as a common denominator. (A)</p> Signup and view all the answers

What is indicated by the accrual basis of accounting?

<p>Transactions are recorded when they occur, not when cash is exchanged. (D)</p> Signup and view all the answers

Which principle focuses on providing all necessary information for stakeholders to make informed decisions?

<p>Full disclosure (C)</p> Signup and view all the answers

When determining the cost of an asset, which principle is primarily used?

<p>Measurement principle (C)</p> Signup and view all the answers

What is the primary purpose of the converged standard on fair value measurement issued by the Boards in 2011?

<p>To make the definition, techniques, and disclosures of fair value the same between U.S.GAAP and IFRS. (C)</p> Signup and view all the answers

Which asset types can be valued at fair value under IFRS but not under U.S.GAAP?

<p>Natural resources and property, plant, and equipment. (D)</p> Signup and view all the answers

What concept statement does U.S.GAAP have regarding fair value estimation when market-related data is unavailable?

<p>Concept Statement No. 7. (B)</p> Signup and view all the answers

What significant difference exists between U.S.GAAP and IFRS concerning fair value standards?

<p>IFRS has issued IFRS 13, which is converged with U.S.GAAP. (A)</p> Signup and view all the answers

How does the unit of measure in the monetary unit assumption differ between countries?

<p>It varies depending on the currency of the country where the company is incorporated. (B)</p> Signup and view all the answers

Which assumption is part of both U.S.GAAP and IFRS frameworks and may show different applications due to cultural differences?

<p>Economic entity assumption. (C)</p> Signup and view all the answers

What is one of the challenging issues faced by the IASB and FASB in developing a converged conceptual framework?

<p>Updating, modifying, and completing the framework effectively. (B)</p> Signup and view all the answers

What aspect of U.S.GAAP is notably different in comparison to IFRS regarding the definitions of financial elements?

<p>The definitions of identified elements are different under U.S.GAAP. (B)</p> Signup and view all the answers

Flashcards

Asset

A present obligation of an entity arising from past events, expected to result in an outflow of economic benefits.

Liability

A present obligation of an entity arising from past events, expected to result in an outflow of economic benefits.

Equity

The residual interest in the assets of an entity after deducting its liabilities.

Income

Increases in economic benefits during an accounting period, increasing equity.

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Expenses

Decreases in economic benefits during an accounting period, decreasing equity.

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Financial Statements

Formal records of the financial activities and position of a business.

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Relevance

The capacity of information to influence decisions.

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Faithful Representation

Information that accurately reflects economic reality.

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Confirmatory Value

Quality of information that confirms users' earlier expectations.

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Neutrality

Information is free from bias or the influence of any individual's wishes or intentions.

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Materiality

An item is not reported if its effect on income would not change a decision.

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Timeliness

Information is available to users in time to be capable of influencing decisions.

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Verifiability

A high degree of consensus among individuals on a given measurement.

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Understandability

Information is presented clearly and concisely.

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Comparability

Information provides comparisons of a company from period to period.

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Relevance

Predictive or confirmatory value, or both; information influences decisions.

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Conceptual Framework

A set of concepts that underlies financial reporting, providing a basis for consistent and useful pronouncements.

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Objective of Financial Reporting

The goal of financial reporting; to provide useful information to users for decision-making.

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Qualitative Characteristics

Traits of accounting information that make it useful for decision-making (e.g., relevance, understandability).

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Basic Assumptions

Fundamental ideas underlying accounting, such as the going concern assumption.

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Reporting Entity

A unit for which financial statements are created.

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Financial Statements

Reports used to present financial information.

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Elements of Financial Statements

Components of financial reports, like assets, liabilities, and equity.

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Recognition of Financial Statement Elements

Rules for deciding when an item is recorded on a financial statement.

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Accounting Information Objective

Provide financial information useful to investors, lenders, & creditors for resource allocation decisions.

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Qualitative Characteristics

Attributes distinguishing better (more useful) accounting information from inferior (less useful) for decisions.

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Reporting Entity

The entity providing/issuing the financial information.

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Financial Reporting

Formal methods of presenting business financial information

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Equity Investors

Individuals/groups holding shares of company stock.

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General-Purpose Financial Statements

Statements intended for many users (e.g. investors, creditors).

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Fundamental Concepts

Core ideas in accounting, guiding financial reporting.

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Basic Objective

Present financial details about the reporting entity useful to equity investors, lenders, etc.

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Economic Entity Assumption

A company's activities are kept separate from its owners and other business units.

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Going Concern Assumption

A company is expected to continue operating for the foreseeable future.

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Monetary Unit Assumption

Financial statements use a stable monetary unit, like a dollar, ignoring inflation.

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Periodicity Assumption

A company's activities are divided into time periods (e.g., months, quarters, years) for reporting.

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Revenue Recognition Principle

Recognize revenue when it is earned, not necessarily when cash is received.

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Expense Recognition Principle

Record expenses when incurred, not just when paid.

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Full Disclosure Principle

Companies must provide all relevant information to users of financial statements.

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Historical Cost Principle

Assets are initially recorded at the amount paid for them.

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Fair Value Measurement Convergence

U.S. GAAP and IFRS now share the same definition, measurement techniques, and disclosures for fair value in financial statements.

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IFRS Fair Value Adoption

IFRS uses fair value more widely than U.S. GAAP, including property, plant, and equipment; natural resources; and sometimes intangible assets.

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U.S. GAAP Fair Value Estimation

U.S. GAAP has a concept statement (Statement of Financial Accounting Concepts No. 7) guiding fair value estimations when market data isn't available.

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IFRS Fair Value Standard

The IFRS standard for fair value measurement (IFRS 13) is converged with U.S. GAAP

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Monetary Unit Assumption

Both U.S. GAAP and IFRS use the monetary unit assumption, but the currency varies per country.

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Economic Entity Assumption

A principle in both U.S. GAAP and IFRS, but some cultures have differing applications (e.g., strong alliances in Japan).

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Conceptual Framework Differences

While the underlying frameworks are similar, the specific elements and their definitions differ between U.S. GAAP and IFRS.

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Converged Conceptual Framework Challenge

Updating, modifying, and completing a converged conceptual framework is a difficult task for the IASB and FASB.

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Study Notes

Intermediate Accounting (IFRS Edition)

  • Textbook authors are Kieso, Weygandt, and Warfield
  • Prepared by Coby Harmon
  • From University of California, Santa Barbara and Westmont College
  • Third edition

Chapter 2: Conceptual Framework for Financial Reporting

  • Learning Objectives: Students should be able to describe the usefulness of a conceptual framework, identify qualitative characteristics of accounting information, review basic accounting assumptions, explain the application of accounting principles, and understand the objective of financial reporting.

Preview of Chapter 2

  • A conceptual framework is needed to ensure that rule-making is consistent and useful
  • Provides an organized structure for the components of a conceptual framework
  • Fundamental Concepts: Qualitative characteristics, Basic Elements
  • Assumptions: Economic entity, Going concern, Monetary unit, Periodicity, Accrual basis
  • Measurement, Recognition, and Disclosure Concepts: Basic principles of accounting, Cost constraint, Structure summary

Need for a Conceptual Framework .

  • Rule-making should be aligned with established concepts.
  • Enables the IASB to produce more useful and consistent pronouncements.

Development of a Conceptual Framework .

  • The Conceptual Framework has chapters concerning the objective, reporting entity, qualitative characteristics, and the framework itself (underlying assumptions, elements, recognition, measurement, and capital concepts).

Overview of the Conceptual Framework

  • Three levels:
    • First level: Objectives of Financial Reporting
    • Second level: Qualitative Characteristics and Elements of Financial Statements
    • Third level: Recognition, Measurement, and Disclosure Concepts

Assumptions, Principles, and Constraints

  • Assumptions: Economic entity, Going concern, Monetary unit, Periodicity, Accrual
  • Principles: Measurement, Revenue recognition, Expense recognition, Full disclosure
  • Constraints: Cost

Basic Objective

  • To provide financial information about the reporting entity that is useful to current and prospective equity investors, lenders, and other creditors in making decisions about providing resources to the entity.
  • Provided by general-purpose financial statements.
  • Users need reasonable knowledge of business and financial accounting to understand the information.

Qualitative Characteristics of Accounting Information

  • IASB identified characteristics to distinguish high-quality information from low-quality information for decision-making purposes.

Qualitative Characteristics

  • Fundamental Qualities:
    • Relevance: Predictive value, Confirmatory value, Materiality.
    • Faithful Representation: Completeness, Neutrality, Free from error.
  • Enhancing Qualities:
    • Comparability
    • Verifiability
    • Timeliness
    • Understandability

Basic Elements of Financial Statements

  • Asset: A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
  • Liability: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
  • Equity: The residual interest in the assets of the entity after deducting all its liabilities.
  • Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
  • Expenses: Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Recognition, Measurement, and Disclosure Concepts

  • Describe how companies should recognize, measure, and report financial elements.
  • Includes assumptions, principles, and constraints

Basic Principles of Accounting

  • Measurement: Historical cost, fair value
  • Fair value hierarchy includes Level 1 (observable inputs), Level 2 (observable inputs), and Level 3 (unobservable inputs).
  • Revenue Recognition: Revenue is recognized when the performance obligation is satisfied.
  • Expense Recognition: Outflows or "using up" of assets or incurring liabilities as a result of delivering or producing goods/services.
    • Product costs
    • Period costs
  • Full Disclosure: Providing information important enough to influence judgement
    • Financial Statements
    • Notes to the Financial Statements
    • Supplementary information

Cost Constraint

  • Weigh the costs of providing information against the benefits derived from it.
  • Rule-making bodies and governmental agencies use cost-benefit analysis.
  • Benefit from disclosure must outweigh the cost.

Global Accounting Insights

  • The IASB and the FASB have similar concepts in their frameworks and converged in some parts
  • Both use historical cost and fair value as measurement principles
  • There are differences in how certain items, like intangible assets, are calculated or measured (U.S. GAAP vs. IFRS)
  • Differences also exist in the monetary unit, and economic entity assumptions because they vary cross-culturally..

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Intermediate Accounting IFRS Edition PDF

Description

Explore the key concepts of Chapter 2 from the 'Intermediate Accounting (IFRS Edition)' textbook. This chapter delves into the conceptual framework for financial reporting, focusing on the usefulness of a framework, qualitative characteristics, and fundamental accounting assumptions. Enhance your understanding of important accounting principles and their applications.

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