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Conceptual

Conceptual Framework
Framework
Underlying
Underlying Financial
Financial Accounting
Accounting

Chapter

2
Intermediate Accounting
12th Edition
Kieso, Weygandt, and Warfield

Chapter
2-1

Prepared by Coby Harmon, University of California, Santa Barbara

Chapter
Chapter 22 Learning
Learning Objectives
Objectives
1.

Describe the usefulness of a conceptual framework.

2.

Describe the FASBs efforts to construct a conceptual


framework.
Understand the objectives of financial reporting.
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 information.

3.
4.
5.
6.
7.
8.

Chapter
2-2

Conceptual
Conceptual Framework
Framework

Conceptual
Conceptual
Framework
Framework
Need
Development

First
First Level:
Level:
Basic
Basic
Objectives
Objectives

Second
Second Level:
Level:
Fundamental
Fundamental
Concepts
Concepts

Third
Third Level:
Level:
Recognition
Recognition and
and
Measurement
Measurement

Qualitative
characteristics
Basic elements

Basic
assumptions
Basic principles
Constraints

Chapter
2-3

Conceptual
Conceptual Framework
Framework
The Need for a Conceptual Framework
To develop a coherent set of standards and rules
To solve new and emerging practical problems

Chapter
2-4

LO 1 Describe the usefulness of a conceptual framework.

Conceptual
Conceptual Framework
Framework
The Framework is comprised of three levels:
First Level = Basic Objectives
Second Level = Qualitative Characteristics and
Basic Elements
Third Level = Recognition and Measurement
Concepts.

Chapter
2-5

LO 2 Describe the FASBs efforts to construct a conceptual framework.

First
First Level:
Level: Basic
Basic Objectives
Objectives
Financial

reporting should provide information


that: the objective of general purpose
financial reporting is to provide financial
information about the reporting entity that is
useful to present and potential investors,
other creditors in making decisions about
providing resources to the entity.

Chapter
2-6

Second
Second Level:
Level: Fundamental
Fundamental Concepts
Concepts
Qualitative Characteristics
The FASB identified the Qualitative Characteristics
of accounting information that distinguish better
(more useful) information from inferior (less useful)
information for decision-making purposes.

Chapter
2-7

LO 4 Identify the qualitative characteristics of accounting information.

Fundamental qualities:
a) Relevance: Predictive value, Confirmatory
value, Materiality
b) Faithful representation: Completeness,
Neutrality, free from errors
Enhancing quality: Comparability Verifiability
Timeliness, Understandibity,

Chapter
2-8

Second
Second Level:
Level: Elements
Elements
Concepts Statement No. 6 defines ten interrelated
elements that relate to measuring the performance and
financial status of a business enterprise.
Moment in Time
Assets
Liabilities
Equity

Chapter
2-9

Period of Time
Investment by owners
Distribution to owners
Comprehensive income
Revenue
Expenses
Gains
Losses

LO 5 Define the basic elements of financial statements.

Third
Third Level:
Level: Recognition
Recognition and
and Measurement
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
1. Economic entity
2. Going concern
3. Monetary unit
4. Periodicity

PRINCIPLES
1. Measurement
Principle

CONSTRAINTS
Cost benefit

2. Revenue recognition
3. Expense recognition
4. Full disclosure

Chapter
2-10

LO 6 Describe the basic assumptions of accounting.

Third
Third Level:
Level: Assumptions
Assumptions
Economic Entity company keeps its activity

separate from its owners and other businesses.

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.

Chapter
2-11

LO 6 Describe the basic assumptions of accounting.

Third
Third Level:
Level: Principles
Principles
Measurement Principle
Historical Cost the price, established by the
exchange transaction, is the cost.
Issues:
Historical cost provides a reliable benchmark for
measuring historical trends.
Fair value information may be more useful.
FASB issued SFAS 15X, Fair Value Measurements
(2005).
Chapter
2-12

Reporting of fair value information is increasing.


LO 7 Explain the application of the basic principles of accounting.

Cont.
Cont.
Fair

Value Principle:
Assets and Liabilities may be recorded at its
fair value other than historical cost . Fair
value is the price that would be received to
sell an asset or paid to transfer a liability in
an orderly transaction between market
participation at measurement date.

Chapter
2-13

Third
Third Level:
Level: Principles
Principles
Revenue Recognition - generally occurs (1) when
realized or realizable and (2) when earned.
Exceptions:
During Production.
At End of Production
Upon Receipt of Cash

Chapter
2-14

LO 7 Explain the application of the basic principles of accounting.

Third
Third Level:
Level: Principles
Principles
Expense recognition- efforts (expenses) should be

matched with accomplishment (revenues) whenever it


is reasonable and practicable to do so. Let the
expense follow the revenues.

Illustration 2-4
Recognition

Chapter
2-15

Expense

LO 7 Explain the application of the basic principles of accounting.

Third
Third Level:
Level: Principles
Principles
Full Disclosure providing information that is of

sufficient importance to influence the judgment and


decisions of an informed user.
Provided through:
Financial Statements
Notes to the Financial Statements
Supplementary information

Chapter
2-16

LO 7 Explain the application of the basic principles of accounting.

Third
Third Level:
Level: Constraints
Constraints
Cost Benefit the cost of providing the information
must be weighed against the benefits that can be
derived from using it.

Chapter
2-17

LO 8 Describe the impact that constraints have


on reporting accounting information.