ACCT-123

Chapter 3
The Accounting Framework
Today’s Goal:

 1. Discuss the Conceptual Framework of Accounting.

 2. Apply the Conceptual Framework of Accounting to Review Exercise 3-1.

Conceptual Framework of Accounting

Why do we have rules and structure in accounting?

 Conceptual Framework of Accounting

Why do we have rules and structure in accounting?

OBJECTIVE
To provide useful financial information to a wide range of
users
 Conceptual Framework of Accounting

Why do we have rules and structure in accounting?

OBJECTIVE
To provide useful financial information to a wide range of
users

NEED: Framework and Foundation

Sand
foundation
Foundation
Framework
 Conceptual Framework of Accounting

Why do we have rules and structure in accounting?

OBJECTIVE
To provide useful financial information to a wide range of
users
 Conceptual Framework of Accounting
OBJECTIVE
To provide useful financial information to a wide range of
users
Conceptual Framework
Conceptual Framework of Accounting
OBJECTIVE
To provide useful financial information to a wide range of
users
Conceptual Framework

Qualitative
Characteristics
Relevance
-Faithful
Representation
-Verifiability
-Comparability
-Timeliness
-Understandability
 Conceptual Framework of Accounting
Qualitative Characteristics
 Relevance – all information for decision making is present.
 Conceptual Framework of Accounting
Qualitative Characteristics
 Relevance – all information for decision making is present.
 Faithful representation – financial statements are complete.
 Conceptual Framework of Accounting
Qualitative Characteristics
 Relevance – all information for decision making is present.
 Faithful representation – financial statements are complete.
 Verifiability – show proof.
 Conceptual Framework of Accounting
Qualitative Characteristics
 Relevance – all information for decision making is present.
 Faithful representation – financial statements are complete.
 Verifiability – show proof.
 Comparability – prepare financial statements similar year to year.
 Conceptual Framework of Accounting
Qualitative Characteristics
 Relevance – all information for decision making is present.
 Faithful representation – financial statements are complete.
 Verifiability – show proof.
 Comparability – prepare financial statements similar year to year.
 Timeliness – No delay in reporting crucial information.
 Conceptual Framework of Accounting
Qualitative Characteristics
 Relevance – all information for decision making is present.
 Faithful representation – financial statements are complete.
 Verifiability – show proof.
 Comparability – prepare financial statements similar year to year.
 Timeliness – No delay in reporting crucial information.
 Understandability – financial statements can be understood by its users.
 Conceptual Framework of Accounting
Qualitative Characteristics
 Relevance – all information for decision making is present.
 Faithful representation – financial statements are complete.
 Verifiability – show proof.
 Comparability – prepare financial statements similar year to year.
 Timeliness – No delay in reporting crucial information.
 Understandability – financial statements can be understood by its users.
Tutorial
 Conceptual Framework of Accounting
OBJECTIVE
To provide useful financial information to a wide range of
users
Conceptual Framework

Qualitative Related
Characteristics Considerations
- Relevance - Benefit vs. Cost
- Faithful - Materiality
Representation
- Verifiability - Prudence
- Comparability
- Timeliness
-
Understandability
 Conceptual Framework of Accounting
Related Considerations
 Benefit vs. Cost – the cost should not outweigh the benefit.
 Conceptual Framework of Accounting
Related Considerations
 Benefit vs. Cost – the cost should not outweigh the benefit.
 Materiality – if the amount is so small the rules do not need to be followed.
 Conceptual Framework of Accounting
Related Considerations
 Benefit vs. Cost – the cost should not outweigh the benefit.
 Materiality – if the amount is so small the rules do not need to be followed.
 Prudence – do not overstate revenue and assets or understate expenses and
liabilities.
 Conceptual Framework of Accounting
Related Considerations
 Benefit vs. Cost – the cost should not outweigh the benefit.
 Materiality – if the amount is so small the rules do not need to be followed.
 Prudence – do not overstate revenue and assets or understate expenses and
liabilities.
 Conceptual Framework of Accounting
OBJECTIVE
To provide useful financial information to a wide range of
users
Conceptual Framework Financial Statement Foundations
Qualitative Related
Characteristics Considerations
-Relevance -Benefit vs. Cost
-Faithful -Materiality
Representation
-Verifiability -Prudence
-Comparability
-Timeliness
-Understandability
Try It
Try It
Conceptual Framework of Accounting
OBJECTIVE
To provide useful financial information to a wide range of
users
Conceptual Framework Financial Statement Foundations
Qualitative Related -Business Entity
Characteristics Considerations Assumption
-Relevance -Benefit vs. Cost -Monetary Unit
Assumption
-Faithful -Materiality
Representation -Basis of Accounting
-Verifiability -Prudence
-Comparability
-Timeliness
-Understandability
 Conceptual Framework of Accounting
Financial Statement Foundations
 Business Entity – accounting transactions are for the business not personal.
 Conceptual Framework of Accounting
Financial Statement Foundations
 Business Entity – accounting transactions are for the business not personal.
 Monetary Unit – accounting records be reported in a single currency.
 Conceptual Framework of Accounting
Financial Statement Foundations
 Business Entity – accounting transactions are for the business not personal.
 Monetary Unit – accounting records be reported in a single currency.
 Basis of Accounting – determine if accrual or cash based accounting is to be
used.
 Conceptual Framework of Accounting
Financial Statement Foundations
 Business Entity – accounting transactions are for the business not personal.
 Monetary Unit – accounting records be reported in a single currency.
 Basis of Accounting – determine if accrual or cash based accounting is to be
used.
Conceptual Framework of Accounting
OBJECTIVE
To provide useful financial information to a wide range of
users
Conceptual Framework Financial Statement Foundations
Qualitative Related -Business Entity -Revenue
Characteristics Considerations Assumption Recognition
-Relevance -Benefit vs. Cost -Monetary Unit -Expense
Assumption Recognition
-Faithful -Materiality
Representation -Basis of Accounting -Measurement
-Verifiability -Prudence -Disclosure
-Comparability -Going Concern
-Timeliness
-Understandability
 Conceptual Framework of Accounting
Financial Statement Foundations
 Revenue Recognition – record revenue when it is earned.
 Conceptual Framework of Accounting
Financial Statement Foundations
 Revenue Recognition – record revenue when it is earned.
 Expense Recognition – record expenses when they are used up.
 Conceptual Framework of Accounting
Financial Statement Foundations
 Revenue Recognition – record revenue when it is earned.
 Expense Recognition – record expenses when they are used up.
 Measurement – record transactions at their historical cost.
 Conceptual Framework of Accounting
Financial Statement Foundations
 Revenue Recognition – record revenue when it is earned.
 Expense Recognition – record expenses when they are used up.
 Measurement – record transactions at their historical cost.
 Disclosure – all information that affects the full understanding of a company’s
financial statements must be included with the financial statements.
 Conceptual Framework of Accounting
Financial Statement Foundations
 Revenue Recognition – record revenue when it is earned.
 Expense Recognition – record expenses when they are used up.
 Measurement – record transactions at their historical cost.
 Disclosure – all information that affects the full understanding of a company’s
financial statements must be included with the financial statements.
 Going Concern – assumes a business will continue to operate into the
foreseeable future.
 Conceptual Framework of Accounting
Financial Statement Foundations
 Revenue Recognition – record revenue when it is earned.
 Expense Recognition – record expenses when they are used up.
 Measurement – record transactions at their historical cost.
 Disclosure – all information that affects the full understanding of a company’s
financial statements must be included with the financial statements.
 Going Concern – assumes a business will continue to operate into the
foreseeable future.
 Conceptual Framework of Accounting
OBJECTIVE
To provide useful financial information to a wide range of
users
Conceptual Framework Financial Statement Foundations
Qualitative Related -Business Entity -Revenue
Characteristics Considerations Assumption Recognition
-Relevance -Benefit vs. Cost -Monetary Unit -Expense
Assumption Recognition
-Faithful -Materiality
Representation -Basis of Accounting -Measurement
-Verifiability -Prudence -Disclosure
-Comparability -Going Concern
-Timeliness
-Understandability
Try It
Try It
Conceptual Framework of Accounting

 Go to: page 87 and 88 in your digital text – Review Exercise 3-1.

 Take 15 minutes to read it.
 A. Which of the qualitative characteristics of financial information has HRI
failed to apply. Explain.
 B. Which of the financial statement foundations has HRI violated. Explain.
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
 A particular piece of information is relevant if its omission may cause the user
of the financial information to make decisions differently. In the financial
statements, the company did not disclose that two different currencies were
used in the comparative balance sheet (one for 2019 and another for 2018).
This omission can potentially affect users’ (investors’) decisions.
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
 a) 2. Timeliness
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
 a) 2. Timeliness
 HRI only prepares financial statements on an annual basis. However, the
company’s hundreds of shareholders would benefit from more timely financial
statements (e.g. quarterly or monthly).
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
 a) 2. Timeliness
 a) 3. Verifiability

Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
 a) 2. Timeliness
 a) 3. Verifiability
 Since several invoices did not match the cost amounts listed in HRI’s
accounting records, the reported costs are not verifiable. Therefore, the
amount of total expenses in the company’s income statement is not a reliable
number.
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
 a) 2. Timeliness
 a) 3. Verifiability
 a) 4. Comparability
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
 a) 2. Timeliness
 a) 3. Verifiability
 a) 4. Comparability
 Even though the company provided balance sheet amounts from the previous
year, two different currencies are used from one year to the next. Because
one currency is stronger than the other, it is not straightforward to compare
the financial information of HRI through time.
Review Exercise 3-1

 a) Which of the qualitative characteristics of financial information has HRI

failed to apply? Explain.
 a) 1. Relevance
 a) 2. Timeliness
 a) 3. Verifiability
 a) 4. Comparability
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 The HRI cash account includes the personal savings of some of the
shareholders. This indicates that the accounting for the business was not
kept separate from the personal affairs of the owners.
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 HRI has included values in two different currencies on its financial
statements.
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 b) 3. Measurement
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 b) 3. Measurement
 Except in rare cases, which will be discussed in later chapters, assets must be
recorded at their historical cost. However, HRI has valued its purchases at
fair market value.
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 b) 3. Measurement
 b) 4. Disclosure
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 b) 3. Measurement
 b) 4. Disclosure
 HRI did not disclose the justification for changing the depreciation method.
 HRI did not disclose the information related to changing the location of the
headquarters and the inconsistent measures of currency.
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 b) 3. Measurement
 b) 4. Disclosure
 b) 5. Going Concern
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 b) 3. Measurement
 b) 4. Disclosure
 b) 5. Going Concern
 There is evidence that the company may not exist and operate in the
foreseeable future.
 HRI has experienced a significant net loss for each of the past three years
(even before adjusting for the unverified expense amounts).
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 b) 3. Measurement
 b) 4. Disclosure
 b) 5. Going Concern
 The company’s property, plant and equipment balance in 2019 declined
significantly from 2018 (even after adjusting for exchange rates). It is
possible some of these assets were sold during 2019.
Review Exercise 3-1

 b) Which of the financial statement foundations has HRI violated? Explain.

 b) 1. The Business Entity Assumption
 b) 2. The Monetary Unit Assumption
 b) 3. Measurement
 b) 4. Disclosure
 b) 5. Going Concern
 The above examples of HRI’s poor financial performance occurred during a
time when the economy was booming. HRI’s performance is normally aligned
with the state of economy. This discrepancy should cause shareholders to
question whether HRI is a going concern.
 Conceptual Framework of Accounting
OBJECTIVE
To provide useful financial information to a wide range of
users
Conceptual Framework Financial Statement Foundations
Qualitative Related -Business Entity -Revenue
Characteristics Considerations Assumption Recognition
-Relevance -Benefit vs. Cost -Monetary Unit -Expense
Assumption Recognition
-Faithful -Materiality
Representation -Basis of Accounting -Measurement
-Verifiability -Prudence -Disclosure
-Comparability -Going Concern
-Timeliness
-Understandability
Today’s Goal:

 1. Discuss the Conceptual Framework of Accounting.

 2. Apply the Conceptual Framework of Accounting to Review Exercise 3-1.