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CHAPTER 2

CHAPTER 2. Conceptual Framework Underlying Financial Accounting. ……..…………………………………………………………. Conceptual Framework. Coherent system Objectives & characteristics Principles & assumptions. Within which rules and standards are developed. Levels within the Framework. Useful Information.

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CHAPTER 2

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  1. CHAPTER 2 Conceptual Framework Underlying Financial Accounting ……..…………………………………………………………... Conceptual Framework • Coherent system • Objectives & characteristics • Principles & assumptions • Within which rules and standards are developed

  2. Levels within the Framework Useful Information Basic objectives Qualitative characteristics Unbiased Basic principles Historical Cost Principle Accounting standards Record plant assets at historical cost.

  3. FIRST LEVEL: BASIC OBJECTIVES • Information useful to stockholders and creditors • Helpful in assessing amount and timing of future cash flows • Information regarding assets and liabilities

  4. SECOND LEVEL: FUNDAMENTAL CONCEPTS Relevant Reliable Comparable Consistent Qualitative Characteristics Useful

  5. Predictive Value Verifiable Feedback Value Faithful Representation Timely Unbiased Relevant Reliable

  6. Assets Liabilities Equity - = Revenues Expenses Gains Losses Basic Elements Increase in Net Assets Decrease in Net Assets Owner Investment Distribution to Owners Comprehensive Income

  7. THIRD LEVEL: RECOGNITION AND MEASUREMENT CONCEPTS Basic Assumptions • Economic entity • Going concern • Monetary unit $ $ • Periodicity

  8. Basic Principles • Historical cost Assets & liabilities recorded at historical cost Verifiable Unbiased Exceptions: investments receivables inventories • Revenue recognition Recognized when realized and earned. Faithful representation Exceptions: long-term contracts minerals installment sales

  9. Matching “Let the expense follow the revenues.” Predictive & Feedback value When there is no connection: rational allocation expense immed. • Full disclosure Detail and condensation for informed decisions. Predictive & Feedback value 3 sources: financial stmnts notes supplementary info

  10. Costs outweigh the benefits • Cost of collecting information • Losing a competitive edge • Amounts are immaterial • An impact on decision makers • Quantitative & qualitative factors • Conservatism Exceptions to the Rules • Special industry practices

  11. Exercise 2-5 (b) Lower of cost or market is used to value inventories instead of historical cost. (e) Repair tools are expensed when purchased rather than being recorded as assets and depreciated. (h) All important aspects of bond contracts are reported , not just the amount of the bond.

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