1、,C H A P T E R 2,CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING,Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield,Describe the usefulness of a conceptual framework. Describe the FASBs efforts to construct a conceptual framework. Understand the objectives of financial reporting
2、. Identify the qualitative characteristics of accounting information. Define the basic elements of financial statements. Describe the basic assumptions of accounting. Explain the application of the basic principles of accounting. Describe the impact that constraints have on reporting accounting info
3、rmation.,Learning Objectives,Decision usefulness Information about economic resources,Conceptual Framework,First Level: Basic Objectives,Second Level: Fundamental Concepts,Third Level: Recognition and Measurement,Need Development,Qualitative characteristics Basic elements,Basic assumptions Basic pri
4、nciples Constraints,Financial Accounting and Accounting Standards,The Need for a Conceptual Framework,To develop a coherent set of standards and rules To solve new and emerging practical problems,Conceptual Framework,LO 1 Describe the usefulness of a conceptual framework.,Review: A conceptual framew
5、ork underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements.,Conceptual Framework,LO 1 Describe the usefulness of a conceptual framework.,True,Review: A conceptual fra
6、mework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary.,Conceptual Framework,LO 1 Describe the usefulness of a conceptual framework.,False,Objectiv
7、e 2,The FASB has issued six Statements of Financial Accounting Concepts (SFAC) for business enterprises.,Development of Conceptual Framework,SFAC No.1 - Objectives of Financial Reporting SFAC No.2 - Qualitative Characteristics of Accounting Information SFAC No.3 - Elements of Financial Statements (s
8、uperceded by SFAC No. 6) SFAC No.5 - Recognition and Measurement in Financial Statements SFAC No.6 - Elements of Financial Statements (replaces SFAC No. 3) SFAC No.7 - Using Cash Flow Information and Present Value in Accounting Measurements,LO 2 Describe the FASBs efforts to construct a conceptual f
9、ramework.,The Framework is comprised of three levels:,First Level = Basic Objectives Second Level = Qualitative Characteristics and Basic Elements Third Level = Recognition and Measurement Concepts.,Conceptual Framework,LO 2 Describe the FASBs efforts to construct a conceptual framework.,The FASB an
10、d the IASB have agreed on a joint project to develop a common and improved conceptual framework.,ASSUMPTIONS Economic entity Going concern Monetary unit Periodicity,PRINCIPLES Measurement Revenue recognition Expense recognition Full disclosure,CONSTRAINTS Cost-benefit Materiality Industry practice C
11、onservatism,OBJECTIVES 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them,ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and
12、 Expenses Gains and Losses,Illustration 2-7 Conceptual Framework for Financial Reporting,First level,Second level,Third level,LO 2 Describe the FASBs efforts to construct a conceptual framework.,QUALITATIVE CHARACTERISTICS Relevance Reliability Comparability Consistency,What are the Statements of Fi
13、nancial Accounting Concepts intended to establish? Generally accepted accounting principles in financial reporting by business enterprises. The meaning of “Present fairly in accordance with generally accepted accounting principles.” The objectives and concepts for use in developing standards of fina
14、ncial accounting and reporting. The hierarchy of sources of generally accepted accounting principles.,Conceptual Framework,LO 2 Describe the FASBs efforts to construct a conceptual framework.,Review:,(CPA adapted),Financial reporting should provide information that:,(a) is useful to present and pote
15、ntial investors and creditors and other users in making rational investment, credit, and similar decisions.,(b) helps present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts.,(c) portrays the economic resources of a
16、n enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources.,First Level: Basic Objectives,LO 3 Understand the objectives of financial reporting.,The current proposed converged framework adopts the FA
17、SBs focus on investors and creditors.,According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on? Generally accepted accounting principles Reporting on managements stewardship. The need for conservatism. The needs of the users of the infor
18、mation.,LO 3,Review:,First Level: Basic Objectives,Question:,How does a company choose an acceptable accounting method, the amount and types of information to disclose, and the format in which to present it?,Second Level: Fundamental Concepts,LO 4 Identify the qualitative characteristics of accounti
19、ng information.,Answer:,By determining which alternative provides the most useful information for decision-making purposes (decision usefulness).,Qualitative Characteristics,“The FASB identified the Qualitative Characteristics of accounting information that distinguish better (more useful) informati
20、on from inferior (less useful) information for decision-making purposes.”,Second Level: Fundamental Concepts,LO 4 Identify the qualitative characteristics of accounting information.,Second Level: Qualitative Characteristics,LO 4 Identify the qualitative characteristics of accounting information.,Ill
21、ustration 2-2 Hierarchy of Accounting Qualities,Understandability,A company may present highly relevant and reliable information, however it was useless to those who do not understand it.,Second Level: Fundamental Concepts,LO 4 Identify the qualitative characteristics of accounting information.,ASSU
22、MPTIONS Economic entity Going concern Monetary unit Periodicity,CONSTRAINTS Cost-benefit Materiality Industry practice Conservatism,OBJECTIVES 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them
23、,QUALITATIVE CHARACTERISTICS Relevance Reliability Comparability Consistency,ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses Gains and Losses,Illustration 2-7 Conceptual Framework for Financial Reporting,First level,Sec
24、ond level,Third level,LO 4 Identify the qualitative characteristics of accounting information.,PRINCIPLES Measurement Revenue recognition Expense recognition Full disclosure,Relevance and Reliability,LO 4,Second Level: Qualitative Characteristics,Primary Qualities:,Relevance making a difference in a
25、 decision. Predictive value Feedback value Timeliness Reliability Verifiable Representational faithfulness Neutral - free of error and bias,In the proposed converged conceptual framework, reliability will be replaced with “faithful representation” as one of the primary qualitative characteristics th
26、at must be present for information to be useful.,Review:,LO 4 Identify the qualitative characteristics of accounting information.,Relevance and reliability are the two primary qualities that make accounting information useful for decision making.,To be reliable, accounting information must be capabl
27、e of making a difference in a decision.,True,False,Second Level: Qualitative Characteristics,ASSUMPTIONS Economic entity Going concern Monetary unit Periodicity,CONSTRAINTS Cost-benefit Materiality Industry practice Conservatism,OBJECTIVES 1. Useful in investment and credit decisions 2. Useful in as
28、sessing future cash flows 3. About enterprise resources, claims to resources, and changes in them,QUALITATIVE CHARACTERISTICS Relevance Reliability Comparability Consistency,ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expens
29、es Gains and Losses,First level,Second level,Third level,LO 4 Identify the qualitative characteristics of accounting information.,Illustration 2-7 Conceptual Framework for Financial Reporting,PRINCIPLES Measurement Revenue recognition Expense recognition Full disclosure,Comparability and Consistency
30、,LO 4 Identify the qualitative characteristics of accounting information.,Second Level: Qualitative Characteristics,Secondary Qualities:,Comparability Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency - When a company applies
31、the same accounting treatment to similar events from period to period.,Review:,LO 4 Identify the qualitative characteristics of accounting information.,Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years
32、before any change in principle is adopted.,False,Second Level: Qualitative Characteristics,ASSUMPTIONS Economic entity Going concern Monetary unit Periodicity,CONSTRAINTS Cost-benefit Materiality Industry practice Conservatism,OBJECTIVES 1. Useful in investment and credit decisions 2. Useful in asse
33、ssing future cash flows 3. About enterprise resources, claims to resources, and changes in them,QUALITATIVE CHARACTERISTICS Relevance Reliability Comparability Consistency,ELEMENTS Assets, Liabilities, and Equity Investments by owners Distribution to owners Comprehensive income Revenues and Expenses
34、 Gains and Losses,First level,Second level,Third level,LO 5 Define the basic elements of financial statements.,Illustration 2-7 Conceptual Framework for Financial Reporting,PRINCIPLES Measurement Revenue recognition Expense recognition Full disclosure,Basic Elements,Investment by owners Distribution
35、 to owners Comprehensive income Revenue Expenses Gains Losses,Second Level: Basic Elements,Concepts Statement No. 6 defines ten interrelated elements that relate to measuring the performance and financial status of a business enterprise.,Assets Liabilities Equity,“Moment in Time”,“Period of Time”,LO
36、 5 Define the basic elements of financial statements.,Second Level: Basic Elements,Exercise 2-3: Identify the element or elements associated with items below.,(a) Arises from peripheral or incidental transactions. (b) Obligation to transfer resources arising from a past transaction. (c) Increases ow
37、nership interest. (d) Declares and pays cash dividends to owners. (e) Increases in net assets in a period from nonowner sources.,LO 5,(a),Elements,(b),(c),(d),(c),(a),(e),Assets Liabilities Equity Investment by owners Distribution to owners Comprehensive income Revenue Expenses Gains Losses,(g),Seco
38、nd Level: Basic Elements,Exercise 2-3: Identify the element or elements associated with items below.,(f) Items characterized by future economic benefit. (g) Equals increase in net assets during the year, after adding distributions to owners and subtracting investments by owners. (h) Arises from inco
39、me statement activities that constitute the entitys ongoing major or central operations.,LO 5,(a),Elements,(b),(d),(c),(a),(f),(e),(h),(c),(h),Assets Liabilities Equity Investment by owners Distribution to owners Comprehensive income Revenue Expenses Gains Losses,(g),Assets Liabilities Equity Invest
40、ment by owners Distribution to owners Comprehensive income Revenue Expenses Gains Losses,Second Level: Basic Elements,Exercise 2-3: Identify the element or elements associated with items below.,(i) Residual interest in the net assets of the enterprise. (j) Increases assets through sale of product. (
41、k) Decreases assets by purchasing the companys own stock. (l) Changes in equity during the period, except those from investments by owners and distributions to owners.,LO 5,(a),Elements,(b),(d),(c),(a),(f),(e),(h),(c),(h),(i),(j),(k),(l),Review:,Second Level: Basic Elements,According to the FASB con
42、ceptual framework, an entitys revenue may result from A decrease in an asset from primary operations. An increase in an asset from incidental transactions. An increase in a liability from incidental transactions. A decrease in a liability from primary operations.,LO 5 Define the basic elements of fi
43、nancial statements.,(CPA adapted),Third Level: Recognition and Measurement,The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.”,ASSUMPTIONS Economic entity Going concern Mone
44、tary unit Periodicity,PRINCIPLES Measurement Revenue recognition Expense recognition Full disclosure,CONSTRAINTS Cost-benefit Materiality Industry practice Conservatism,LO 6 Describe the basic assumptions of accounting.,Economic Entity company keeps its activity separate from its owners and other bu
45、sinesses. Going Concern - company to last long enough to fulfill objectives and commitments. Monetary Unit - money is the common denominator. Periodicity - company can divide its economic activities into time periods.,Third Level: Assumptions,LO 6 Describe the basic assumptions of accounting.,Third
46、Level: Assumptions,LO 6 Describe the basic assumptions of accounting.,Brief Exercise 2-4: Identify which basic assumption of accounting is best described in each item below.,The economic activities of KC Corporation are divided into 12-month periods for the purpose of issuing annual reports. (b) Sol
47、ectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. (c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reportin
48、g purposes.,Periodicity,Going Concern,Monetary Unit,Economic Entity,Measurement The most commonly used measurements are based on historical cost and fair value. Issues: Historical cost provides a reliable benchmark for measuring historical trends. Fair value information may be more useful. Recently
49、the FASB has taken the step of giving companies the option to use fair value as the basis for measurement of financial assets and financial liabilities. Reporting of fair value information is increasing.,Third Level: Principles,LO 7 Explain the application of the basic principles of accounting.,Revenue Recognition - generally occurs (1) when realized or realizable and (2) when earned. Exceptions:,Third Level: Principles,LO 7 Explain the application of the basic principles of accounting.,Illustration 2-4 Timing of Revenue Recognition,
