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Accounting
2-1
Prepared by
Coby Harmon
University of California, Santa Barbara
Intermediate Accounting
14th Edition
Learning
Learning Objectives
Objectives
2-3
1.
2.
3.
4.
5.
6.
7.
8.
Conceptual
Conceptual Framework
Framework For
For
Financial
Financial Accounting
Accounting
Conceptual
Framework
Need
Development
Overview
First Level:
Basic Objectives
Second Level:
Fundamental
Concepts
Qualitative
characteristics
Basic elements
Third Level:
Recognition and
Measurement
Basic assumptions
Basic principles
Constraints
Summary of the
structure
2-4
Conceptual
Conceptual Framework
Framework
The Need for a Conceptual Framework
2-5
Conceptual
Conceptual Framework
Framework
Review Question (true or false):
A conceptual framework 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.
True
2-6
Conceptual
Conceptual Framework
Framework
Review Question (true or false):
A conceptual framework 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.
False
2-7
Development
Development of
of Conceptual
Conceptual Framework
Framework
The FASB has issued seven Statements of Financial
Accounting Concepts (SFAC) for business enterprises.
SFAC No.1 - Objectives of Financial Reporting.
SFAC No.2 - Qualitative Characteristics of Accounting Information.
SFAC No.3 - Elements of Financial Statements.
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.
SFAC No.8 - The Objective of General Purpose Financial Reporting and
Qualitative Characteristics of Useful Financial Information
(replaces SFAC No. 1 and No. 2)
2-8
LO 2
Conceptual
Conceptual Framework
Framework
Overview of the Conceptual Framework
2-9
Illustration 2-7
Conceptual Framework
for Financial Reporting
2-10
LO 2
Conceptual
Conceptual Framework
Framework
Review
What are the Statements of Financial Accounting Concepts intended to
establish?
a.
b.
c.
d.
2-11
First
First Level:
Level: Basic
Basic Objectives
Objectives
Objective of general-purpose financial reporting is:
To provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions
about providing resources to the entity.
2-12
First
First Level:
Level: Basic
Basic Objectives
Objectives
Review
According to the FASB conceptual framework, the objectives
of financial reporting for business enterprises are based on?
2-13
a.
b.
c.
d.
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.
2-14
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Illustration 2-2
Hierarchy of
Accounting Qualities
2-15
Relevance
Relevance
Illustration 2-7
Conceptual Framework
for Financial Reporting
2-16
LO 4
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Fundamental QualityRelevance
2-17
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Fundamental QualityRelevance
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Fundamental QualityRelevance
2-19
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Fundamental QualityRelevance
Faithful
Faithful Representation
Representation
Illustration 2-7
Conceptual Framework
for Financial Reporting
2-21
LO 4
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Fundamental QualityFaithful Representation
2-22
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Fundamental QualityFaithful Representation
2-23
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Fundamental QualityFaithful Representation
2-24
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Fundamental QualityFaithful Representation
2-25
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Enhancing Qualities
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Enhancing Qualities
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Enhancing Qualities
Timeliness means having information available to decisionmakers before it loses its capacity to influence decisions.
2-28
Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Enhancing Qualities
Basic
Basic Elements
Elements
Illustration 2-7
Conceptual Framework
for Financial Reporting
2-30
LO 5
Second
Second Level:
Level: Basic
Basic 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
Period of Time
2-31
Investment by owners
Distribution to owners
Comprehensive income
Revenue
Expenses
Gains
Losses
Second
Second Level:
Level: Basic
Basic Elements
Elements
Exercise 2-5: Identify the element or elements associated with
items below.
Elements
Assets
(b)
Equity
(e)
(c)
Investment by owners
(d)
Distribution to owners
(c)
Comprehensive income
Revenue
2-32
Liabilities
Expenses
(a)
Gains
(a)
Losses
LO 5
Second
Second Level:
Level: Basic
Basic Elements
Elements
Exercise 2-5: Identify the element or elements associated with
items below.
Elements
(f) Items characterized by future
(f) Assets
economic benefit.
(g) Equals increase in net assets
during the year, after adding
distributions to owners and
subtracting investments by
owners.
(h) Arises from income statement
activities that constitute the
entitys ongoing major or
central operations.
Liabilities
Equity
Investment by owners
Distribution to owners
(g)
(h)
Comprehensive income
(h)
Expenses
Revenue
Gains
Losses
2-33
LO 5
Second
Second Level:
Level: Basic
Basic Elements
Elements
Exercise 2-5: Identify the element or elements associated with
items below.
Elements
Assets
(i)
(k)
Distribution to owners
(l)
Comprehensive income
(j)
Revenue
Liabilities
Equity
Investment by owners
Expenses
Gains
Losses
LO 5
Second
Second Level:
Level: Basic
Basic Elements
Elements
Review:
According to the FASB conceptual framework, an entitys
revenue may result from
2-35
a.
b.
c.
d.
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.
Illustration 2-7
Conceptual Framework
for Financial Reporting
2-36
LO 5
Third
Third Level:
Level: Basic
Basic Assumptions
Assumptions
Economic Entity company keeps its activity separate from
its owners and other businesses.
2-37
Third
Third Level:
Level: Assumptions
Assumptions
Brief Exercise 2-7: Identify which basic assumption of
accounting is best described in each item below.
(a) The economic activities of KC Corporation are
divided into 12-month periods for the purpose of
issuing annual reports.
(b) Solectron 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
reporting purposes.
2-38
Periodicity
Monetary
Unit
Going Concern
Economic
Entity
Third
Third Level:
Level: Basic
Basic Principles
Principles
Measurement Principle The most commonly used
measurements are based on historical cost and fair value.
Issues:
2-39
Third
Third Level:
Level: Basic
Basic Principles
Principles
Revenue Recognition - generally occurs (1) when realized
or realizable and (2) when earned.
Exceptions:
2-40
Illustration 2-5
Timing of Revenue Recognition
Third
Third Level:
Level: Basic
Basic Principles
Principles
Expense Recognition - Let the expense follow the
revenues.
Illustration 2-6
Expense Recognition
2-41
Third
Third Level:
Level: Basic
Basic Principles
Principles
Full Disclosure providing information that is of sufficient
importance to influence the judgment and decisions of an
informed user.
Provided through:
2-42
Financial Statements
Supplementary information
Third
Third Level:
Level: Basic
Basic Principles
Principles
Brief Exercise 2-8: Identify which basic principle of accounting is
best described in each item below.
(a) KC Corporation reports revenue in its income
statement when it is earned instead of when the cash is
collected.
Revenue
Recognition
Expense
Recognition
Full
Disclosure
Measurement
2-43
Third
Third Level:
Level: Constraints
Constraints
Cost Constraint cost of providing information must be
weighed against the benefits that can be derived from using it.
2-44
Third
Third Level:
Level: Constraints
Constraints
Brief Exercise 2-10: What accounting constraints are
illustrated by the items below?
(a) KC, Inc. reports agricultural crops on its balance
sheet at market value.
(b) Rafael Corporation discloses fair value information
on its loans because it already gathers this
information internally.
(c) Willis Company does not disclose any information
in the notes to the financial statements unless the
value of the information to users exceeds the
expense of gathering it.
(d) A broker-dealer records all assets and liabilities at
fair value.
2-45
Industry
Practice
Cost
Constraint
Cost
Constraint
Industry
Practice
LO 8
Illustration 2-7
Conceptual Framework
for Financial Reporting
2-46
Summary
Summary
of
of the
the
Structure
Structure
RELEVANT FACTS
2-47
In 2010, the IASB and FASB completed the first phase of a jointly
created conceptual framework. In this first phase, they agreed on the
objective of financial reporting and a common set of desired
qualitative characteristics.
RELEVANT FACTS
2-48
RELEVANT FACTS
2-49
2-50
2-53
Copyright
Copyright
Copyright 2012 John Wiley & Sons, Inc. All rights reserved.
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programs or from the use of the information contained herein.
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