Chapter 2- Conceptual Framework of Financial Reporting

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1. 2 Fundamental Relevance and Faithful Representation 14. Distribution to Decreases in net assets of a particular
Qualities are: Owners enterprise resulting from transferring
assets, rendering services, or incurring
2. 4 Basic Economic Entity, Going Concern, Monetary
liabilities by the enterprise to owners.
Assumptions Unit, Periodicity
Distribution to owners decrease ownership
that underlie
interests ( or equity) in an enterprise.
the financial
accounting 15. Economic the economic activity can be identified with
structure are: Entity a particular unit of accountability. (
Assumption Company keeps its activity separate and
3. Assets Probably future economics benefits
distinct from its owners and any other
obtained or controlled by a particular
business unit)
entity as a result of past transactions or
events. 16. Equity Residual interest in the assets of an entity
that remains after deducting its liabilities. In
4. Basic Elements Assets, Liabilities, Equity, Investment by
a business enterprise, the equity is the
of Financial Owners, Distribution to Owners,
ownership interest.
Statements Comprehensive Income, Revenues,
Expenses, Gains, Losses. 17. Expense The recognition of expenses is related to
Recognition net changes in assets and earning
5. Basic Objective To provide financial information about the
Principle revenues.
of Financial reporting entity that is useful to present
Reporting and potential investors, lenders, and other 18. Expenses Outflows or other using up of assets or
creditors in making decisions about incurrences of liabilities(or a combination
providing resources to the entity. of both) during a period from delivering or
producing goods, rendering services, or
6. Basic Principles Measurement Principle, Revenue
carrying out other activities that constitute
of Accounting Recognition Principle, Expense
the entity's ongoing major or central
Recognition Principle, and Full Disclosure
operations.
Principle.
19. Fair Value the price that would be received to sell an
7. Comparability Information that is measured and reported
asset or paid to transfer a liability in an
in a similar manner for different
orderly transaction between market
companies.
participants at the measurement date.
8. Complementary Enhancing Qualities (market value)
to the
20. Faithful the numbers and descriptions match what
fundamental
Representation really existed or happened.
qualitative
characteristics 21. Free from Error self-explanatory (error free)
9. Completeness all the information that is necessary for 22. Full Disclosure Providing information that is of sufficient
faithful representation is provided. Principle importance to influence the judgments and
decisions of an informed user.
10. Comprehensive Change in equity (net assets) of an entity
Income during a period from transactions and 23. Gains Increases in equity (net assets) from
other events and circumstances from peripheral or incidental transactions of an
nonowner sources. It includes all changes entity and from all other transactions and
in equity during a period except those other events and circumstances affecting
resulting from investments by owners and the entity during a period except those that
distributions to owners. result from revenues or investments by
owners.
11. Confirmatory has value that helps users confirm or
Value correct prior expectations. 24. Going Concern that the company will have a long-life and
Assumption fulfill their objectives and commitments.
12. Consistency present when a company applies the same
accounting treatment to similar events, 25. Historical Cost accounting for and reporting assets or
from period to period. liabilities on the basis of acquisition price.
13. Cost Constraint weighing the costs of providing the 26. Industry The peculiar nature of some industries and
information against the benefits that can be Practices business concerns sometimes requires
derived from using it. departure from basic theory.
27. Ingredients of Completeness, Neutrality, and Free from
Faithful Error.
Representation
28. Ingredients of Predictive Value, Confirmatory Value, and
Relevance Materiality
29. Investment by Increases in net assets of a particular
Owners enterprise resulting from transfers to it from
other entities of something of value to
obtain or increase ownership interest (or
equity) in it. Assets are most commonly
received as investments by owners, but
that which is received may also include
services or satisfaction or conversion of
liabilities of the enterprise.
30. Liabilities Probably future sacrifices of economic
benefits arising from present obligations of
a particular entity to transfer assets or
provide services to other entities in the
future as a result of past transactions or
events.
31. Losses Decreases in equity (net assets) from
peripheral or incidental transactions of an
entity and from all other transactions and
other events and circumstances affecting
the entity during a period except those that
result from expenses or distributions to
owners.
38. Purpose of to distinguish better (more useful)
Qualitative information from inferior information for
Characteristics decision making purposes.
39. Relevance accounting information must be capable
means: of making a difference in a decision.
40. Revenue Revenue is recognized when earned.
Recognition
Principle
41. Revenues Inflows or other enhancements of assets
of an entity or settlement of its
liabilities(or a combination of both)
during a period from delivering or
producing goods, rendering services, or
other activities that constitute the entity's
ongoing major or central operations.
42. Timeliness having information available to decision
makers before it loses its capacity to
influence decisions.
43. Understandability the quality of information that lets
reasonably informed users see its
significance. Enhanced when information
is classified, characterized, and
presented clearly and concisely.
44. Verifiability occurs when independent measurers,
using the same methods, obtain similar
results.

32. Materiality information has this quality if omitting it or 45. What are the Comparability/Consistency, Verifiability,
misstating it could influence decisions that Enhancing Timeliness, Understandability
users make on the basis of the reported Qualities?
financial information.
33. Measurement We presently have a "mixed attribute"
Principle system that permits the use of various
measurement bases. The most commonly
used are based on historical cost and fair
value.
34. Monetary Unit means that money is the common
Assumption denominator of economic activity and
provides an appropriate basis for
accounting measurement and analysis.
35. Neutrality A company cannot select information to
favor one set of interested parties over
another. (unbiased)
36. Periodicity implies that a company can divide its
Assumption economic activities into artificial time
periods (monthly, quarterly, yearly)
37. Predictive has value as an input to predictive
Value processes used by investors to form their
own expectations about the future.