MGA 301 Exam 1 Study Guide
Chapter 2
Conceptual Framework (Constitution for the Profession) - A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements
Should enable the FASB to develop a coherent set of standards and rules solve new and emerging practical problems
Fundamental Qualities
Relevance – Relevant information is that which is capable of making a difference in a decision. To be relevant, information should have
Predictive value: helps users form their own expectations about the future
Confirmatory value: helps users confirm or correct prior expectations
Materiality: omitting it or misstating it could influence decisions
Faithful representation – means that the numbers and descriptions match what really existed or happened.
Completeness: all the information that is necessary for faithful representation is provided. An omission leads to false or misleading info.
Neutrality: a company cannot select information to favor one set of interested parties over another
Free from error: will be a more accurate representation of a financial item
Enhancing Qualities
Comparability – Information has been measured and reported in a similar manner for different enterprises.
Verifiability – Similar results are obtained even though different people make the measurements.
Timeliness – Information is available at the time it is needed.
Understandability – information contents and significance should be understandable.
Assumptions
Economic Entity – an entity for which you’re making financial disclosure can be identified with a particular unit of accountability
Going Concern – an entity for which you’re making financial disclosure will have an indefinite life.
Monetary Unit – money is the common denominator of economic activity.
Periodicity – the economic activities of an enterprise can be divided into artificial time periods.
Conceptual Framework (Constitution for the Profession) - A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements
Should enable the FASB to develop a coherent set of standards and rules solve new and emerging practical problems
Fundamental Qualities
Relevance – Relevant information is that which is capable of making a difference in a decision. To be relevant, information should have
Predictive value: helps users form their own expectations about the future
Confirmatory value: helps users confirm or correct prior expectations
Materiality: omitting it or misstating it could influence decisions
Faithful representation – means that the numbers and descriptions match what really existed or happened.
Completeness: all the information that is necessary for faithful representation is provided. An omission leads to false or misleading info.
Neutrality: a company cannot select information to favor one set of interested parties over another
Free from error: will be a more accurate representation of a financial item
Enhancing Qualities
Comparability – Information has been measured and reported in a similar manner for different enterprises.
Verifiability – Similar results are obtained even though different people make the measurements.
Timeliness – Information is available at the time it is needed.
Understandability – information contents and significance should be understandable.
Assumptions
Economic Entity – an entity for which you’re making financial disclosure can be identified with a particular unit of accountability
Going Concern – an entity for which you’re making financial disclosure will have an indefinite life.
Monetary Unit – money is the common denominator of economic activity.
Periodicity – the economic activities of an enterprise can be divided into artificial time periods.