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Cards In This Set
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Describe the usefulness of a conceptual framework
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A conceptual framework is needed to (1) create standards that build on an established body of concepts and objectives, (2) provide a framework for solving new and emerg- ing practical problems, (3) increase financial statement users’ understanding of and confidence in financial reporting, and (4) enhance comparability among different companies’ financial statements.
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Describe the main components of the FA framework
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The first level deals with the objective of financial reporting. The second level includes the qualitative characteristics of useful information and elements of financial statements. The third level includes foundational principles and conventions.
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What is the objective of Financial Reporting? FR
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The objective of financial reporting is to provide information that is useful to indi- viduals making investment and credit decisions
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What are the qualitative characteristics of FA?
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The overriding criterion by which accounting choices can be judged is decision usefulness; that is, the goal is to provide the information that is the most useful for decision-making. Fundamental characteristics include relevance and faithful representation. These two characteristics must be present. Enhancing characteristics include comparability, verifiability, timeliness, and understandability. There may be trade-offs
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Describe the basic elements of financial statements
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The basic elements of financial statements are (1) assets, (2) liabilities, (3) equity, (4) revenues, (5) expenses, (6) gains, and (7) losses
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Describe the 10 foundational principles of accounting
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(1) Economic entity: the assumption that the activity of a business enterprise can be kept separate and distinct from its owners and any other business unit. (2) Control: the entity has the power to make decisions and reap the benefits. (3) Revenue recognition: revenue is generally recognized when it is (a) earned, (b) measurable, and (c) collectible (realizable). (4) Matching assists in the measurement of income by ensur- ing that costs (relating to long-lived assets) incurred in earning revenues are booked in the same period as the revenues earned. (5) Periodicity: the assumption that an enterprise’s economic activities can be divided into artificial time periods to facilitate timely reporting. (6) Monetary unit: the assumption that money is the common denominator by which economic activity is conducted, and that the monetary unit gives an appropriate basis for measurement and analysis. (7) Going concern: the assumption that the business enterprise will have a long life. (8) Historical cost prin- ciple: existing GAAP requires that many assets and liabilities be accounted for and reported based on their acquisition price. Many assets are later revalued. (9) Fair value principle: assets and liabilities are valued at fair value, that is, an exit price and viewed from a market participant perspective. (10) Full disclosure principle: account- ants follow the general practice of providing information that is important enough to influence an informed user’s judgement and decisions.
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Explain the factors that contribute to choice and or bias in FR
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- lack of clear GAAP standards / guidelines- increasingly complex business transactions- Financial engineering - the process of legally structuring a business arrangement or transaction so that it meets the company’s financial reporting objective- Fraudulent financial reporting often results from pressures on individuals or the company. These pressures may come from various sources, including worsening company, industry, or economic conditions; unrealistic internal budgets; and financial statement focal points related to contractual, regulatory, or capital market expectations.
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Indicate the QUALITATIVE characteristic of financial information for:
(a) Financial statements should include all information necessary to portray the underlying transactions. (b) Financial information should make a difference in the decision-making of a user. (c) Financial information should not favour one user or stakeholder over another. |
A) completeness
b) relevance c) neutral |
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Indicate the QUALITATIVE characteristic of financial information for:
d) Financial information should reflect the economic substance of business events or transactions. (e) Financial information should help users assess the impact of past, present, or future events. (f) Financial information must be reliable and without errors or omissions. |
D) representational faithfulness
e) predictive value f) freedom from omission or error |
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Indicate the QUALITATIVE characteristic of financial information for:
(g) Financial information should help users confirm or correct their previous expectations. (h) Financial information should be reported and measured in a similar way within a company and between different companies. (i) Financial information should be of sufficient quality and clarity to permit reasonably informed users to assess the information’s significance. (j) Financial information should be available to users before it loses its ability to be decision-useful. (k) Knowledgeable, independent users should be able to achieve similar results and consensus when accounting for a particular financial transaction. |
G) feedback value
h) comparability i) understandability j) timeliness k) verifiability |
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Identify which qualitative characteristic of accounting information is best described in each item below. (Do not simply use relevance and representational faithfulness.)
a) The annual reports of Melissa Corp. are audited by public accountants. b) Able Corp. and Mona, Inc. both use the straight-line depreciation method. c) Swedish Corp. issues its quarterly reports within five days after each quarter ends. |
A) verifiability
b) comparability c) timeliness |
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Identify which qualitative characteristic of accounting information is best described in each item below. (Do not simply use relevance and representational faithfulness.)
d) Philips Inc. disposed of one of its two subsidiaries that were included in its consolidated statements for prior years. e) The CFO of WebDesign stresses that factual, truthful, unbiased information is the overriding consideration when preparing WebDesign’s financial information. f) EB Energy Inc. appreciates that financial information may be misrepresented or misinterpreted if all pertinent information is not included. |
D) comparability
e) neutrality f) freedom from bias / omission of error |
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What principle(s) from the conceptual framework does Master Limited use in each of the following situations?
(a) Master includes the activities of its subsidiaries in its financial statements. (b) Master was involved in litigation with Kinshasa Ltd. over a product malfunction. This litigation is disclosed in the financial statements. (c) Master allocates the cost of its tangible assets over the period when it expects to receive revenue from these assets. (d) Master records the purchase of a new packaging machine at its cash equivalent price. (e) Master prepares quarterly financial statements for its users. (f) In preparing its financial statements, Master assesses its ability to continue to operate for the foreseeable future. (g) Master records revenue when risks and rewards are passed to the purchaser. (h) Master records its agricultural inventory at fair value. The company feels that this market-based value is more relevant, objective, and verifiable. |
A) economic entity assumption
b) full disclosure c) matching principle d) historical cost e) periodicity f) going concern principle g) revenue recognition h) fair value |
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Discuss whether the following items would meet the definition of an asset currently proposed by the IASB and FASB. If so, explain with reference to the appropriate criteria.
(a) Corporate fleet of cars for senior management. (b) Franchise licence to operate a Tim Hortons store. (c) Customized manufacturing machinery that can only be used for one product line and for which there is a small and limited customer market. |
Criteria are 1) present economic resources not contingent on a future event 2) right to (exclusive) access:
a) yes. cars are tangible economic resources, used to produce economic benefit to the company. Can be sold, company has exclusive access to them b) yes. represent an economic resource, can be sold and are for use exclusively by the company c) yes. can be bought or sold, is used to produce economic benefit. small and limited market is irrelevant |
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Discuss whether the following items would meet the definition of an asset currently proposed by the IASB and FASB. If so, explain with reference to the appropriate criteria.
(d) The parent company has guaranteed the operating line of credit of its subsidiary. Is the guarantee an asset for the sub- sidiary? (e) FreshWater Inc. bottles and sells the spring water from a natural spring near its property. Is the natural spring an asset of the company? (f) Mountain Ski Resort Ltd. often has to use its snow-making machine to make snow for its hills and trails when there is not enough natural snowfall. Is the snow an asset for Mountain Ski? |
Criteria are 1) present economic resources not contingent on a future event 2) right to (exclusive) access:
d) no. cannot be bought or sold, access to capital is not an asset e) no. freshwater does not have exclusive access to the water so it cannot be considered an asset f) the made snow could be considered an asset, but it would be very short lived and the costs expenses. |
