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Conceptual Framework - Intermediate Accounting - Lecture Notes, Study notes of Accounting

Amity University - BiharAccounting

Conceptual Framework, First Level, Basic Objectives, Second Level, Fundamental Concepts, Fundamental Qualities, Enhancing Qualities, Basic Elements, Investments by Owners, Distributions to Owners. I have lecture slides, homework, lecture notes and quizes for Intermediate Accounting course. I want to shear them with everyone. Enjoy docsity.com members.

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2011/2012

Uploaded on 12/18/2012

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REVIEW
1. Chapter 2 outlines the development of a conceptual framework for financial reporting. The
conceptual framework is composed of a basic objective, fundamental concepts, and
recognition, measurement, and disclosure concepts. Each of these topics is discussed in
Chapter 2 and should enhance your understanding of the topics covered in intermediate
accounting.
Conceptual Framework
2. (L.O. 1) A conceptual framework in accounting is important because rule-making
should be built on and relate to an established body of concepts. The benefits of a
soundly developed conceptual framework are as follows: (a) it should be easier to issue a
coherent set of standards and rules; and (b) practical problems should be more quickly
solved.
3. (L.O. 2) The FASB’s conceptual framework is developed in a series of concept
statements (collectively the Conceptual Framework). The conceptual framework has the
following 3 levels:
a. First level: The objective of financial reporting, the “why” or purpose of accounting.
b. Second level: The qualitative characteristics and the elements, which form a bridge
between the 1st and 3rd levels.
c. Third level: Recognition, measurement, and disclosure concepts, the “how” or
implementation.
First Level: Basic Objectives
4. (L.O. 3) The basic objective of financial reporting is the foundation of the conceptual
framework and requires that general-purpose financial reporting provide information
about the reporting entity that is useful to present and potential equity investors, lenders,
and other creditors in making decisions about providing resources to the entity. In order to
understand general-purpose financial reporting, users need reasonable knowledge of
business and financial matters.
Second Level: Fundamental Concepts
5. (L.O. 4) Companies must decide what type of information to disclose and how to disclose
it. These choices are determined by which method or alternative provides the most
decision-useful information. The qualitative characteristics of accounting information
distinguish better and more useful information from inferior and less useful information.
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REVIEW

  1. Chapter 2 outlines the development of a conceptual framework for financial reporting. The conceptual framework is composed of a basic objective, fundamental concepts, and recognition, measurement, and disclosure concepts. Each of these topics is discussed in Chapter 2 and should enhance your understanding of the topics covered in intermediate accounting.

Conceptual Framework

  1. (L.O. 1) A conceptual framework in accounting is important because rule-making should be built on and relate to an established body of concepts. The benefits of a soundly developed conceptual framework are as follows: (a) it should be easier to issue a coherent set of standards and rules; and (b) practical problems should be more quickly solved.
  2. (L.O. 2) The FASB’s conceptual framework is developed in a series of concept statements (collectively the Conceptual Framework). The conceptual framework has the following 3 levels:

a. First level: The objective of financial reporting, the “why” or purpose of accounting.

b. Second level: The qualitative characteristics and the elements, which form a bridge between the 1 st^ and 3rd^ levels.

c. Third level: Recognition, measurement, and disclosure concepts, the “how” or implementation.

First Level: Basic Objectives

  1. (L.O. 3) The basic objective of financial reporting is the foundation of the conceptual framework and requires that general-purpose financial reporting provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. In order to understand general-purpose financial reporting, users need reasonable knowledge of business and financial matters.

Second Level: Fundamental Concepts

  1. (L.O. 4) Companies must decide what type of information to disclose and how to disclose it. These choices are determined by which method or alternative provides the most decision-useful information. The qualitative characteristics of accounting information distinguish better and more useful information from inferior and less useful information.

Fundamental qualities:

  1. The fundamental qualities of accounting information are:

a. Relevance – information that is capable of making a difference in a decision. Comprised of

  1. Predictive value means that the information can help users form expectations about the future.
  2. Confirmatory value means that the information validates or refutes expectations based on previous evaluations.
  3. Materiality means that information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.

b. Faithful representation – numbers and descriptions match what really happened or existed. Comprised of

  1. Completeness meaning all necessary information is provided.
  2. Neutrality meaning the information is unbiased.
  3. Free from error meaning the information is accurate.

Enhancing qualities:

  1. Enhancing qualities complement the fundamental qualities and include: a. Comparability – companies record and report information in a similar manner. Consistency is another type of comparability and means the company uses the same accounting methods from period to period. b. Verifiability – independent people using the same methods arrive at similar conclusions. c. Timeliness – information is available before it loses its relevance. d. Understandability – reasonably informed users should be able to comprehend the information that is clearly classified and presented.

Basic Elements

  1. (L.O. 5) An important aspect of developing an accounting theoretical structure is the body of basic elements or definitions. Ten basic elements that are most directly related to measuring the performance and financial status of a business enterprise are formally defined in SFAC No. 6. These elements, as defined below, are further discussed and interpreted throughout the text.

Assets. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Going Concern Assumption. In the absence of contrary information, a company is assumed to have a long life. The current relevance of the historical cost principle is dependent on the going-concern assumption.

Monetary Unit Assumption. Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. The monetary unit is assumed to remain relatively stable over the years in terms of purchasing power. In essence, this assumption disregards any inflation or deflation in the economy in which the company operates.

Periodicity Assumption. The life of a company can be divided into artificial time periods for the purpose of providing periodic reports on the economic activities of the company.

Basic Principles

  1. (L.O. 7) Certain basic principles are followed by accountants in recording the transactions of a business entity. These principles relate to how assets, liabilities, revenues, and expenses are to be identified, measured, and reported. The following is a brief review of the basic principles considered in Chapter 2 of the text:

Historical Cost Principle. Acquisition cost is considered a reliable basis upon which to account for assets and liabilities of a company. Historical cost has an advantage over other valuations–it is thought to be verifiable.

Fair Value Principle. Recently, the FASB appears to support greater use of fair value measurements in the financial statements. Fair value information may be more useful than historical cost for certain types of assets and liabilities and in certain industries.

Revenue Recognition Principle. Revenue is recognized (1) when realized or realizable and (2) when earned. Recognition at the time of sale provides a uniform and reasonable test. Certain variations in the revenue recognition principle include: certain long-term construction contracts, end-of-production recognition, and recognition upon receipt of cash.

Expense Recognition Principle. Recognition of expenses is related to net changes in assets and earning revenues. The expense recognition principle is implemented in accordance with the definition of expense by matching efforts (expenses) with accom- plishment (revenues).

Full Disclosure Principle. In the preparation of financial statements, the accountant should include sufficient information to permit the knowledgeable reader to make an informed judgment about the financial condition of the company in question.

Constraints

  1. (L.O. 8) Although accounting theory is based upon certain assumptions and the application of basic principles, there are some exceptions to these assumptions. These exceptions, often called constraints, sometimes justify departures from basic accounting theory. The constraints presented in Chapter 2 are the following:

Cost Constraint. The cost constraint (or cost-benefit relationship) relates to the notion that the benefits to be derived from providing certain accounting information should exceed the costs of providing that information. The difficulty in cost-benefit analysis is that the costs and especially the benefits are not always evident or measurable.

Industry Practices. Basic accounting theory may not apply with equal relevance to every industry that accounting must serve. The fair presentation of financial position and results of operations for a particular industry may require a departure from basic accounting theory because of the peculiar nature of an event or practice common only to that industry.