Intermediate accounting 13th kieso warfield chapter 02

Chapter
2-1


CHAPTER

2

CONCEPTUAL FRAMEWORK
UNDERLYING FINANCIAL
ACCOUNTING
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
2-2


Learning
Learning Objectives
Objectives
1.

Describe the usefulness of a conceptual framework.

2.

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.

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

Chapter
2-3


Financial
Financial Accounting
Accounting and
and Accounting
Accounting Standards
Standards

Conceptual
Framework

Need

Development

Chapter
2-4

First Level: Basic
Objectives

Decision
usefulness
Information about
economic
resources

Second Level:
Fundamental
Concepts
Qualitative
characteristics
Basic elements

Third Level:
Recognition and
Measurement
Basic assumptions
Basic principles
Constraints


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
2-5

LO 1 Describe the usefulness of a conceptual framework.


Conceptual
Conceptual Framework
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.

True

Chapter
2-6

LO 1 Describe the usefulness of a conceptual framework.

Conceptual
Conceptual Framework
Framework
Review:
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

Chapter
2-7

LO 1 Describe the usefulness of a conceptual framework.


Development
Development of
of Conceptual
Conceptual Framework
Framework
The FASB has issued six 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SFAC No.3 - Elements of Financial Statements (superceded by
SFAC No. 6)

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

Chapter
2-8

2
LO 2 Describe the FASB’s efforts to construct a conceptual Objective
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.

The FASB and the IASB have agreed on a joint project to
develop a common and improved conceptual framework.
Chapter
2-9

LO 2 Describe the FASB’s efforts to construct a conceptual framework.

ASSUMPTIONS

PRINCIPLES

1. Economic entity

1. Measurement

1. Cost-benefit

2. Going concern

2. Revenue recognition

2. Materiality

3. Monetary unit

3. Expense recognition

3. Industry practice

4. Periodicity

4. Full disclosure

4. Conservatism

QUALITATIVE

CHARACTERISTICS
Relevance
Reliability
Comparability
Illustration 2-7
Conceptual Framework
for Financial Reporting

Consistency

1.
2.
3.

Chapter
2-10

CONSTRAINTS

Third
level

ELEMENTS
Assets, Liabilities, and Equity
Investments by owners
Distribution to owners
Comprehensive income
Revenues and Expenses
Gains and Losses

OBJECTIVES
Useful in investment
and credit decisions
Useful in assessing
future cash flows
About enterprise
resources, claims to
resources, and
changes in them

Second level

First level

LO 2 Describe the FASB’s
efforts to construct a
conceptual framework.


Conceptual
Conceptual Framework
Framework
Review:
What are the Statements of Financial Accounting
Concepts intended to establish?

Chapter
2-11

a.

Generally accepted accounting principles in
financial reporting by business enterprises.

b.

The meaning of “Present fairly in accordance with
generally accepted accounting principles.”

c.

The objectives and concepts for use in developing
standards of financial accounting and reporting.

d.

The hierarchy of sources of generally accepted
accounting principles.
(CPA adapted)
LO 2 Describe the FASB’s efforts to construct a conceptual framework.


First
First Level:
Level: Basic
Basic Objectives
Objectives
Financial
Financial reporting
reporting should

should provide
provide information
information that:
that:
(a)
(a) isisuseful
usefulto
topresent
presentand
andpotential
potentialinvestors
investorsand
andcreditors
creditorsand
and
other
otherusers
usersin
inmaking
makingrational
rationalinvestment,
investment,credit,
credit,and
andsimilar
similar
decisions.
decisions.
(b)
(b) helps
helpspresent

presentand
andpotential
potentialinvestors
investorsand
andcreditors
creditorsand
andother
other
users
usersin
inassessing
assessingthe
theamounts,
amounts,timing,
timing,and
anduncertainty
uncertaintyof
of
prospective
prospectivecash
cashreceipts.
receipts.
(c)
(c) portrays
portraysthe
theeconomic
economicresources
resourcesof
ofan
anenterprise,

enterprise,the
theclaims
claims
to
tothose
thoseresources,
resources,and
andthe
theeffects
effectsof
oftransactions,
transactions,events,
events,
and
andcircumstances
circumstancesthat
thatchange
changeits
itsresources
resourcesand
andclaims
claimsto
to
those
thoseresources.
resources.
Chapter
2-12

LO 3 Understand the objectives of financial reporting.

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?
a.

Generally accepted accounting principles

b.

Reporting on management’s stewardship.

c.

The need for conservatism.

d.

The needs of the users of the information.
The current proposed converged framework adopts the
FASB’s focus on investors and creditors.

Chapter

2-13

LO 3


Second
Second Level:
Level: Fundamental
Fundamental Concepts
Concepts
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?

Answer:
By determining which alternative provides the most
useful information for decision-making purposes
(decision usefulness).

Chapter
2-14

LO 4 Identify the qualitative characteristics of accounting information.


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
2-15

LO 4 Identify the qualitative characteristics of accounting information.


Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics

Illustration 2-2
Hierarchy of Accounting
Qualities

Chapter
2-16

LO 4 Identify the qualitative characteristics of accounting information.


Second

Second Level:
Level: Fundamental
Fundamental Concepts
Concepts
Understandability
A company may present highly relevant and reliable
information, however it was useless to those who do
not understand it.

Chapter
2-17

LO 4 Identify the qualitative characteristics of accounting information.


ASSUMPTIONS

PRINCIPLES

CONSTRAINTS

1. Economic entity

1. Measurement

1. Cost-benefit

2. Going concern

2. Revenue recognition

2. Materiality

4. Full disclosure

4. Conservatism

Relevance
and
Reliability
3. Expense
recognition
3. Industry practice
Relevance
and
Reliability

3. Monetary unit
4. Periodicity

QUALITATIVE
CHARACTERISTICS
Relevance
Reliability
Comparability
Illustration 2-7
Conceptual Framework
for Financial Reporting

Consistency

1.
2.
3.

Chapter
2-18

Third
level

ELEMENTS
Assets, Liabilities, and Equity
Investments by owners
Distribution to owners
Comprehensive income
Revenues and Expenses
Gains and Losses

OBJECTIVES
Useful in investment
and credit decisions
Useful in assessing
future cash flows
About enterprise
resources, claims to
resources, and
changes in them

Second level

First level

LO 4 Identify the qualitative
characteristics of
accounting information.


Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Primary Qualities:
Relevance – making a difference in a decision.
Predictive value
Feedback value
Timeliness

Reliability
Verifiable
Representational faithfulness
Neutral - free of error and bias

Chapter
2-19

In the proposed converged conceptual framework, reliability will be
replaced with “faithful representation” as one of the primary qualitative
characteristics that must be present for information to be useful.

LO 4


Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics

Review:
Relevance and reliability are the two primary
qualities that make accounting information useful
for decision making.

True
To be reliable, accounting information must be
capable of making a difference in a decision.

False
Chapter
2-20

LO 4 Identify the qualitative characteristics of accounting information.


ASSUMPTIONS

PRINCIPLES

CONSTRAINTS

1. Economic entity

1. Measurement

1. Cost-benefit

2. Going concern

2. Revenue recognition

2. Materiality

4. Full disclosure

4. Conservatism

Comparability
and
Consistency
3. Expense
recognition
3. Industry practice
Comparability
and
Consistency

3. Monetary unit
4. Periodicity

QUALITATIVE
CHARACTERISTICS
Relevance
Reliability
Comparability
Illustration 2-7
Conceptual Framework
for Financial Reporting

Consistency

1.
2.
3.

Chapter
2-21

Third
level

ELEMENTS
Assets, Liabilities, and Equity
Investments by owners
Distribution to owners
Comprehensive income
Revenues and Expenses
Gains and Losses

OBJECTIVES
Useful in investment
and credit decisions
Useful in assessing
future cash flows
About enterprise
resources, claims to
resources, and
changes in them

Second level

First level

LO 4 Identify the qualitative
characteristics of
accounting information.


Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics
Secondary 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.

Chapter
2-22

LO 4 Identify the qualitative characteristics of accounting information.


Second
Second Level:
Level: Qualitative
Qualitative Characteristics
Characteristics

Review:
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.

False

Chapter
2-23

LO 4 Identify the qualitative characteristics of accounting information.

ASSUMPTIONS

PRINCIPLES

1. Economic entity

1. Measurement

1. Cost-benefit

2. Going concern

2. Revenue recognition

2. Materiality

4. Full disclosure

4. Conservatism

3. Monetary unit
4. Periodicity

Basic
Elements
3. Expense
recognition
3. Industry practice

Basic
Elements

QUALITATIVE
CHARACTERISTICS
Relevance
Reliability
Comparability
Illustration 2-7
Conceptual Framework
for Financial Reporting

Consistency

1.
2.
3.

Chapter
2-24

CONSTRAINTS

Third
level

ELEMENTS
Assets, Liabilities, and Equity
Investments by owners
Distribution to owners

Comprehensive income
Revenues and Expenses
Gains and Losses

OBJECTIVES
Useful in investment
and credit decisions
Useful in assessing
future cash flows
About enterprise
resources, claims to
resources, and
changes in them

Second level

First level

LO 5 Define the basic
elements of financial
statements.


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

Chapter
2-25

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

LO 5 Define the basic elements of financial statements.