Kế toán, kiểm toán - Chapter 2: Conceptual framework underlying financial accounting

CHAPTER 2CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTINGINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Describe the usefulness of a conceptual framework.Describe the FASB’s 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.Learning ObjectivesConceptual FrameworkNeedDevelopmentFirst Level: Basic ObjectivesSecond Level: Fundamental ConceptsThird Level: Recognition and MeasurementBasic assumptionsBasic principlesConstraintsQualitative characteristicsBasic elementsConceptual FrameworkDecision usefulnessThe Need for a Conceptual FrameworkTo develop a coherent set of standards and rulesTo solve new and emerging practical problemsConceptual FrameworkLO 1 Describe the usefulness of a conceptual framework.Review: 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.Conceptual FrameworkLO 1 Describe the usefulness of a conceptual framework.FalseTrueTrueReview: 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.Conceptual FrameworkLO 1 Describe the usefulness of a conceptual framework.FalseTrueFalseObjective 2The FASB has issued six Statements of Financial Accounting Concepts (SFAC) for business enterprises.Development of Conceptual FrameworkSFAC No.1 - Objectives of Financial ReportingSFAC No.2 - Qualitative Characteristics of Accounting InformationSFAC No.3 - Elements of Financial Statements (superceded by SFAC No. 6)SFAC No.4 - Nonbusiness OrganizationsSFAC No.5 - Recognition and Measurement in Financial Statements SFAC No.6 - Elements of Financial Statements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 MeasurementsLO 2 Describe the FASB’s efforts to construct a conceptual framework.The Framework is comprised of three levels:First Level = Basic ObjectivesSecond Level = Fundamental ConceptsThird Level = Recognition and Measurement Concepts.Conceptual FrameworkLO 2 Describe the FASB’s efforts to construct a conceptual framework.ASSUMPTIONSEconomic entityGoing concernMonetary unitPeriodicityPRINCIPLESHistorical costRevenue recognitionMatchingFull disclosureCONSTRAINTSCost-benefitMaterialityIndustry practiceConservatismOBJECTIVES1. Useful in investment and credit decisions2. Useful in assessing future cash flows3. About enterprise resources, claims to resources, and changes in themELEMENTSAssets, Liabilities, and EquityInvestments by ownersDistribution to ownersComprehensive incomeRevenues and ExpensesGains and LossesIllustration 2-6 Conceptual Framework for Financial ReportingFirst levelSecond levelThird levelLO 2 Describe the FASB’s efforts to construct a conceptual framework.QUALITATIVE CHARACTERISTICSRelevanceReliabilityComparabilityConsistencyWhat are the Statements of Financial 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 financial accounting and reporting.The hierarchy of sources of generally accepted accounting principles.Conceptual FrameworkLO 2 Describe the FASB’s efforts to construct a conceptual framework.Review:(CPA adapted)Financial reporting should provide information that: (a) is useful to present and potential 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 an 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 ObjectivesLO 3 Understand the objectives of financial reporting.According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on?Generally accepted accounting principlesReporting on management’s stewardship.The need for conservatism.The needs of the users of the information.Conceptual FrameworkLO 3 Understand the objectives of financial reporting.(CPA adapted)Review: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 ConceptsLO 4 Identify the qualitative characteristics of accounting 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) information from inferior (less useful) information for decision-making purposes.”Second Level: Fundamental ConceptsLO 4 Identify the qualitative characteristics of accounting information.Second Level: Qualitative CharacteristicsLO 4 Identify the qualitative characteristics of accounting information.Illustration 2-2 Hierarchy of Accounting QualitiesUnderstandabilityA company may present highly relevant and reliable information, however it was useless to those who do not understand it.Second Level: Fundamental ConceptsLO 4 Identify the qualitative characteristics of accounting information.ASSUMPTIONSEconomic entityGoing concernMonetary unitPeriodicityPRINCIPLESHistorical costRevenue recognitionMatchingFull disclosureCONSTRAINTSCost-benefitMaterialityIndustry practiceConservatismOBJECTIVES1. Useful in investment and credit decisions2. Useful in assessing future cash flows3. About enterprise resources, claims to resources, and changes in themQUALITATIVE CHARACTERISTICSRelevanceReliabilityComparabilityConsistencyELEMENTSAssets, Liabilities, and EquityInvestments by ownersDistribution to ownersComprehensive incomeRevenues and ExpensesGains and LossesIllustration 2-6 Conceptual Framework for Financial ReportingFirst levelSecond levelThird levelRelevance and ReliabilityLO 4 Identify the qualitative characteristics of accounting information.LO 4 Identify the qualitative characteristics of accounting information.Second Level: Qualitative CharacteristicsPrimary Qualities:Relevance – making a difference in a decision.Predictive valueFeedback valueTimelinessReliabilityVerifiableRepresentational faithfulnessNeutral - free of error and biasReview: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 capable of making a difference in a decision.Second Level: Qualitative CharacteristicsFalseTrueTrueFalseTrueFalseASSUMPTIONSEconomic entityGoing concernMonetary unitPeriodicityPRINCIPLESHistorical costRevenue recognitionMatchingFull disclosureCONSTRAINTSCost-benefitMaterialityIndustry practiceConservatismOBJECTIVES1. Useful in investment and credit decisions2. Useful in assessing future cash flows3. About enterprise resources, claims to resources, and changes in themQUALITATIVE CHARACTERISTICSRelevanceReliabilityComparabilityConsistencyELEMENTSAssets, Liabilities, and EquityInvestments by ownersDistribution to ownersComprehensive incomeRevenues and ExpensesGains and LossesIllustration 2-6 Conceptual Framework for Financial ReportingFirst levelSecond levelThird levelLO 4 Identify the qualitative characteristics of accounting information.Comparability and ConsistencyLO 4 Identify the qualitative characteristics of accounting information.Second Level: Qualitative CharacteristicsSecondary Qualities:Comparability – Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency - When a company applies 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 before any change in principle is adopted.Second Level: Qualitative CharacteristicsFalseTrueFalseASSUMPTIONSEconomic entityGoing concernMonetary unitPeriodicityPRINCIPLESHistorical costRevenue recognitionMatchingFull disclosureCONSTRAINTSCost-benefitMaterialityIndustry practiceConservatismOBJECTIVES1. Useful in investment and credit decisions2. Useful in assessing future cash flows3. About enterprise resources, claims to resources, and changes in themQUALITATIVE CHARACTERISTICSRelevanceReliabilityComparabilityConsistencyELEMENTSAssets, Liabilities, and EquityInvestments by ownersDistribution to ownersComprehensive incomeRevenues and ExpensesGains and LossesIllustration 2-6 Conceptual Framework for Financial ReportingFirst levelSecond levelThird levelElementsLO 5 Define the basic elements of financial statements.Investment by ownersDistribution to ownersComprehensive incomeRevenueExpensesGainsLossesSecond Level: ElementsConcepts Statement No. 6 defines ten interrelated elements that relate to measuring the performance and financial status of a business enterprise.AssetsLiabilitiesEquity“Moment in Time”“Period of Time”LO 5 Define the basic elements of financial statements.Second Level: ElementsExercise 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 ownership interest.(d) Declares and pays cash dividends to owners.(e) Increases in net assets in a period from nonowner sources.LO 5 Define the basic elements of financial statements.(a)Elements(b)(c)(d)(c)(a)(e)AssetsLiabilitiesEquity Investment by ownersDistribution to ownersComprehensive incomeRevenueExpensesGains Losses(g)Second Level: ElementsExercise 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 income statement activities that constitute the entity’s ongoing major or central operations.LO 5 Define the basic elements of financial statements.(a)Elements(b)(d)(c)(a)(f)(e)(h)(c)(h)AssetsLiabilitiesEquity Investment by ownersDistribution to ownersComprehensive incomeRevenueExpensesGains Losses(g)AssetsLiabilitiesEquity Investment by ownersDistribution to ownersComprehensive incomeRevenueExpensesGains LossesSecond Level: ElementsExercise 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.(k) Decreases assets by purchasing the company’s own stock.(l) Changes in equity during the period, except those from investments by owners and distributions to owners.LO 5 Define the basic elements of financial statements.(a)Elements(b)(d)(c)(a)(f)(e)(h)(c)(h)(i)(j)(k)(l)Review:Second Level: ElementsAccording to the FASB conceptual framework, an entity’s revenue may result froma 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 financial statements.(CPA adapted)Third Level: Recognition and MeasurementThe 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.”ASSUMPTIONSEconomic entityGoing concernMonetary unitPeriodicityPRINCIPLESHistorical costRevenue recognitionMatchingFull disclosureCONSTRAINTSCost-benefitMaterialityIndustry practiceConservatismLO 6 Describe the basic assumptions of accounting.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.Third Level: AssumptionsLO 6 Describe the basic assumptions of accounting.Third Level: AssumptionsLO 6 Describe the basic assumptions of accounting.Exercise Identify which basic assumption of accounting is best described in each item below.The economic activities of FedEx 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.PeriodicityGoing ConcernMonetaryUnitEconomic EntityHistorical 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).”Reporting of fair value information is increasing.Third Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.Revenue Recognition - generally occurs (1) when realized or realizable and (2) when earned.Exceptions:During Production.At End of ProductionUpon Receipt of CashThird Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.Matching - efforts (expenses) should be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so. “Let the expense follow the revenues.” Third Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.Illustration 2-4 Expense RecognitionFull Disclosure – providing information that is of sufficient importance to influence the judgment and decisions of an informed user.Provided through:Financial StatementsNotes to the Financial StatementsSupplementary InformationThird Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.Third Level: PrinciplesLO 7 Explain the application of the basic principles of accounting.Exercise Identify which basic principle of accounting is best described in each item below.(a) Norfolk Southern Corporation reports revenue in its income statement when it is earned instead of when the cash is collected.(b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.(d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater.Revenue RecognitionMatchingFull DisclosureHistoricalCostCost Benefit – the cost of providing the information must be weighed against the benefits that can be derived from using it. Materiality - an item is material if its inclusion or omission would influence or change the judgment of a reasonable person. Industry Practice - the peculiar nature of some industries and business concerns sometimes requires departure from basic accounting theory. Conservatism – when in doubt, choose the solution that will be least likely to overstate assets and income. Third Level: ConstraintsLO 8 Describe the impact that constraints have on reporting accounting information.Exercise What accounting constraints are illustrated by the items below?(a) Zip’s Farms, Inc. reports agricultural crops on its balance sheet at market value.(b) Crimson Tide Corporation does not accrue a contingent lawsuit gain of $650,000.(c) Wildcat 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) Sun Devil Corporation expenses the cost of wastebaskets in the year they are acquired.Industry PracticeConservatismThird Level: ConstraintsCost-BenefitMaterialityLO 8 Describe the impact that constraints have on reporting accounting information.Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. 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