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6.3.

3 Development Of Conceptual Frame Work


Exhibit 6.3 illustrate teh overall scope of tehe coceptual framework and list t related
document issuied to 1982 by FASB

At the first level, the objective identify the goal and the purpose of the accounting. Statment
of financial Accounting Concept No.1 ( objective Of Financial Reporting by Business
Enterprises) present the goal and the purposes of accounting for business enterprises.
Statment of Financial Accounting Concepts No.4 (Objective of Financial Reporting by
Nonbusiness Organization) present the goal and puposes of accounting for nonbusiness
organization.
At the second level, the fundamental include the qualitative caharacteristic of accounting
information (Statment of Financial Accounting Concept No. 2) and the definition of the
eement of financial statments (Statement of Financial Accounting Concepts No.3). In
summary the five statment of financial accounting concept issued relating to financial
reporting for business enterprice are :
SFAC No.1 : Objective of Financial Reporting Business Enterprises, wich present the goal
and puposes of accounting.
SFAC No. 2 : Qualitative Characteristic of Accounting Information, wich examines the
characteristic that make accounting information usefull.
SFAC No. 3 : Element of Financial Statements of Business Enterprise, wich provides
definition of items in financial statements, suc as asset s, liabilities, rvenue and expense.

SFAC No.5 : Recognition and Measurement in financial Statment of business Enterprises,


wich set forth fundamental recognition and masurement criteria and quidance on what
information should be formaly included in fiancial statments.
SFAC No. 6 : Element of Financial Statements, which replaces SFAC No. 3 and exxpand
its scope to include not-for-profit organization.
SFAC No. 7 : Using cash flow information and the present Value in Accounting
Measurements, provide a framework for usig cash floe and present value basis for
measurement.
The third level, the operational guidelines that the accountant uses in establishing and dying
accounting standards include the recognition criteria, finacial statments versus financial
reporting and measurements (Statments of Financial Accounting Standards No.33)
At the fourth level, the display mechanism that accounting uses to convey accounting
nformation include reporting eranings, reporting funds flow and liquidity, and reporting
financial position.
6.3.4 The Objective of Financial Accounting
The objective of financial reporting by business enterprises
The FASb began its efforts to develop a constitution for financial accounting and reporting in
november 1978 when it issued authorative, broadly based guidelines spelling out the
objective of financial reporting in statement of financial Accounting Concepts No.1,
Objective od fiancial Reporting By business Enterprises. The statement was not limited to teh
contents of financial statements :
Financial reporting includes not only financial statement but also other means of
communicating information that relates, directly or indirectly, to the information provided by
the accounting system that is, inforation about an enterprises resources, obligation,
earnings, etc. The objectives of fiancial reporting are summarized in the following exerpts
from the statement :
Financial reporting should provide information that is useful to present the potential ivestor,
and creditor and the other user in making rational investment, credit, and similiar decision.
(Paragraph 34)
Financial reporting should provide information to help present and potential investor and
creditors and oteher user in assesing the amounts, timing, and uncertainty of prospectiv cash
recipts from devidend or interest and proceeds from the sale, redemtion, or maturity of
security or loan. (Paragraph 37)

Financial reporting should provide information about the economic resource of an enterprise,
the claims to those resource, and the effect of transaction, events, and sircumstance that
change resources and claim to those resources. (Paragraph 40)
Financial reporting should provide information about an enterprises financial
performanceduring a period. (Paragraph 42)
The primary focus of financial reporting is informaion about an enterprises performance
provideed by measures of earning and its components (Paragraph 43)
Fianancial reporting should provide information abaou how an enterprse obtain and spend
cash, about its borowing and repayment borowing, about its capital transaction, including
cash dividends and the otehr distributions of enterprise resource to owner, and about other
factor that may affect an enterprises liquidity or solvency (Paragraph 49)
Fianacial reporting should provide information about how management of an enterprise has
discharged its stewardship responsibility to owner (Paragraph 50)
Financial reporting should provide information that is useful to managers and director in
making decisions in the interest of owners (Paragraph 52)
The objective of financial reporting by nonbusiness organization
Nonbusiness organization differ from business organization in at least two respect.
Nonbusiness organization :
1. Have no indicator of performance comparable to business enterprisess profit
2. Generally are not subject to the test of copetition in market.
Three major distinguishing characteristic of nonbusiness organization are :
1. Significant amount of resources are recived from source providers, who do not expect
to recive either repayment or economic benefits proportionate to the resources they
provided.
2. The business operates primarily for puposes other than the provision of goods or
service at a profit or profit equivalen.
3. There are no defined ownership interest that can be sold, transfered, or redeemed, or
that would convey entitlement to ashare of residual distribution of resource in the
event of liquidation of the organization.
Four particular groups are especially interested in the information provided by the financial
reporting of nonbusiness organization :
1. The source providers : lender, suplliers, employees, taxpayers, membeer and
contributors.

2. The constituents who use an dthe benefit from the services rendered by the
organization.
3. The governing and overseeing bodies responsible for setting policies and overseeing
and appraising the managers of nonbusiness organization.
4. The managers of nonbusiness organization.
6.3.5 Fundamental Concepts
The fundamental concepts incude both qualitative characteristic of accounting information
and the definition of the elements of financial statements.
The qualitative caharacteristic of accounting information
The FASB issued statement of Financial Accounting Concept No. 2, Qualitative
Characteristic of Accounting Information, to provide criteria for chosing between :
1. Alternative accounting and reporting method; and
2. Diclosure requirements.
The basic elements of financial statements of business enterprises
Statment of Financial Accounting Concepts No.3, Element of Financial Statement of Bisiness
Enterprises, defines ten interrelatted elements that directly related to measuring the
performace and status of an enterprise : asset, liabilities, equity, investment by owner,
distributios to owner, coprehensive income, revenue, expenses, gain, and losses. These
element are defined as follows:
Asset : probable future economic benefits obtained or controlled by a particular entity as a
result of past transaction or events
Liabilities : probable future sacrifeces economic obtained or controlled by a particular entity
as a result of past transaction or events.
Equity : residual interest in the asset of an entity that remains after deducting its liabilities.
Investment by owner : increase in the net of asset that result from transfer by owner.
Distributionns to owner : decrease in the net of asset that result from from transfer to owner.
Comprehensive income : the change in the equity (net assets) of an entity during a given
period that result from transaction and the otehr events and sircumstance from nowner
sources.
Revenue : inflow or other enhancements of the asset of an entity or the settlement of liability
Expenses : outflow or other ussing-up of the asset of an entity or the incurrence of liability
Gains : increase in equity (net assets) from the transaction that happen in one accounting
periodic

Losses : decrease in equity (net assets) from the transaction that happen in one accounting
periodic