A.Conceptual Framework underlying Financial Accounting
1. FASB’s Statements of Financial Accounting Concepts (SFACs) serve as a coherent
basis for accounting and reporting standards.
a.Objectives state the purposes of financial accounting.
Fundamental concepts are the basis of financial accounting.
1. The four assumptions underlying financial accounting, generally acknowledged but not
formally codified, are economic-entity, going-concern, monetary-unit, and periodicity.
2. The four principles that provide guidance for recording financial information are revenue
recognition, matching, historical-cost, and full-disclosure.
3. The four constraints that limit the process of recognition in the financial statements are
cost-benefit, materiality, industry practices, and conservatism.
B.Objectives of Financial Reporting by Business Enterprises
1. Information should be useful for investment and credit decisions.
2. Information should be useful in assessing cash flow prospects.
3. Information should be provided about enterprise resources, claims to those resources, and
changes in them.
4.The primary focus is on information about performance provided by measures of earnings
and its components.
C.Qualitative Characteristics of Accounting Information
1.ecision usefulness is essential. Decision makers must ultimately determine what
information is useful.
Understandability (a user-specific quality) depends on the traits of users and of the
information.
The primary decision-specific qualities are relevance and reliability. Relevance consists of
feedback value and predictive value. An ancillary aspect of relevance is timeliness.
The ingredients of reliability are representational faithfulness, verifiability, and neutrality.
Secondary and interactive qualities are comparability and consistency.
Materiality is the threshold for recognition.
Costs and benefits is the pervasive constraint.
D.Elements of Financial Statements
1. Moment-in-time elements are assets, liabilities, and equity or net assets.
2. Intervals-of-time elements include investments by owners, distributions to owners,
comprehensive income, revenues, expenses, gains, and losses. The first three apply only
to businesses.
3.Accrual accounting records the financial effects of transactions and other events and
circumstances when they occur. It embraces accruals and deferrals and requires allocation
and amortization.
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E.Recognition and Measurement in Financial Statements of Business Enterprises
1. A full set of financial statements discloses financial position, earnings and comprehensive
income, cash flows, and owner transactions.
2.To be recognized in the financial statements, an item must meet four fundamental
recognition criteria:
a. The item must meet the definition of an element of financial statements.
b. The item must have a relevant attribute measurable with sufficient reliability.
c. The information must be capable of making a difference in the user decisions.
d. The information must be representationally faithful, verifiable, and neutral.
Revenues and gains should be realized or realizable. Revenues also should be earned.
a.Realization “is the process of converting noncash resources and rights into money.”
4. The pervasive expense recognition principles are associating cause and effect (matching),
systematic and rational allocation, and immediate recognition.
5Measurement attributes of assets and liabilities in current use include historical cost,
historical proceeds, current (replacement) cost, current market value (exit value), net
realizable value, net settlement value, and present value.
F.Using Cash Flow Information and Present Value in Accounting Measurements
1.The objectives of present value for initial recognition and fresh-start purposes are to
estimate fair value. A measurement based on present value also should reflect uncertainty
so that variations in risks are incorporated.
The usual calculation of present value employs one set of estimated cash flows and one
interest rate. The expected cash flow approach combines present value and expected
value.
In the measurement of liabilities, an entity's credit standing is always incorporated.
G.Fair Value Measurements (FVM)
1. “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 participants at the measurement date.”
2.Valuation techniques should be consistently applied, appropriate in the circumstances, and
based on sufficient data. Any of the following should be used to measure fair value: (a) the
market approach, (b) the income approach, and (c) the cost approach.
3. The fair value hierarchy establishes priorities among inputs to valuation techniques. The
level of the FVM depends on the lowest level input significant to the entire FVM. Level 1
inputs are unadjusted quoted prices in active markets for identical assets (liabilities) that
the entity can access at the measurement date. Level 2 inputs are observable (excluding
Level 1 quoted prices). Level 3 inputs are unobservable.
HGenerally accepted accounting principles are the “convention, rules, and procedures
necessary to define accepted accounting practice at a particular time.”
1.Category (a), the most authoritative, includes the primary sources of nongovernmental
GAAP: FASB Statements and Interpretations, APB Opinions, and AICPA Accounting
Research Bulletins.
© 2009 Gleim Publications, Inc. and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited.
I.Interest is the payment received by holders of money to forgo current consumption. The current
consumer of money pays interest for its use. The effects of interest are reflected in standard
tables that facilitate that calculation of present values and future values.
1.The interest method of amortizing discount or premium results in a constant rate of return
on a receivable or payable. The effective rate is applied to the net carrying amount to
determine interest revenue or expense. The amount amortized is the difference between
interest revenue or expense and the actual cash received or paid.
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