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ACCTG 301 � Intermediate Accounting 1 by HZPSpuY5


									                           ACCTG 301 – Intermediate Accounting 1
                             Conceptual Framework Lecture 1
 Purpose? “…to set forth fundamentals on which financial accounting and
  reporting standards will be based.”1
“…intended and expected to serve the public interest within the context of
the role of financial accounting and reporting in the economy – to provide
evenhanded financial and other information that, together with information
from other sources, facilitates efficient functioning of capital and other
markets and otherwise assists in promoting efficient allocation of scarce
resources in the economy.” -- also -- “…for making reasoned choices
among alternative uses of scarce resources in the conduct of business and
economic activities.”2
 Who are the anticipated users of this framework as indicated in CON 1?

 What are the Statements?

CON. 1               Objectives of Financial Reporting by Business Enterprises. (Nov
                     1978)      
CON. 2               Qualitative Characteristics of Accounting Information. (May
                     1980)      
CON. 3               Superseded by CON 6. (Dec. 1980)
CON. 4               Objectives of Financial Reporting by Nonbusiness Enterprises.
                          (Dec. 1980)
CON. 5               Recognition and Measurement of Financial Statements of
                     Business Enterprises.     (Dec. 1984)    
CON. 6               Elements of Financial Statements. (Dec. 1985)       
CON. 7               Using Cash Flow Information and Present value in Accounting
                     Measurements.       (Feb. 2000)
    Con 1 preamble

ACCTG301 – Widdison – Conceptual Framework                                        1
                                              Objectives – CON 1
                        Provide information:
                        1. Useful for decision making.
                        2. That helps predict cash flows.
                        3. About economic resources, claims to resources, and
                           changes in resources and      claims.

                                                                                   Recognition and
   Qualitative Characteristics                                                   Measurement Concepts
             CON 2                                                                      CON 5

   Understandability                          Elements – CON 6
             Primary                  Assets                                     Economic entity
   Relevance                          Liabilities                                Going concern
    Predictive value                  Equity                                     Periodicity
    Feedback value                    Investments by owners                      Monetary unit
    Timeliness                        Distributions to owners
   Reliability                        Revenues                                  Principles
    Verifiability                    Expenses                                   Historical cost
    Representational                  Gains                                       Realization
        faithfulness                  Losses                                      Matching
    Neutrality                        Comprehensive income                        Full disclosure


         |               |                                                                  |
         |               |                                                                  |
                                           Financial Statements                           |

   Constraints – CON 2           • Balance sheet                                           |
                                 • Income statement
   Cost effectiveness
   Materiality                  • Statement of cash flows
                                 • Statement of shareholders' equity
   Conservatism                  • Related disclosures
   Industry Practice

ACCTG301 – Widdison – Conceptual Framework                                                              2
      Financial reporting should provide ________that is _______to present
       and potential investors and creditors and other users in making
       ________ investment, credit, and similar __________.
      Financial reporting should provide information to help present and
       potential investors and creditors and other users to assess the
       _____________________ of prospective _____________.
      Financial reporting should provide information about the ______
       ________ of an enterprise; the _________________ (obligations); and
       the effects of __________, __________, _____________that cause
       changes in resources and claims to those resources.

ACCTG301 – Widdison – Conceptual Framework                               3
Q.     What is the level of expertise expected of users? ¶34

Q.     What are the characteristics and limitations of information financial
       reporting can provide? ¶17-18

Q.     What does Con. 1 say about accuracy of measurement? ¶ 20

Q.     What does Con. 1 say about the cost of providing useful information?

ACCTG301 – Widdison – Conceptual Framework                                4
Q.     Why are the statements referred to as “general purpose” financial
       statements? (¶24 – 26, 28, 30

Q.     Does Con. 1 address what is meant by “useful” information?

Q.     Why do you think there is emphasis on determination of predictability
       of cash receipts, and how does this relate to the reporting enterprise?
       ¶37 -- 39

Q.     What kind of financial reporting other than through financial statements
       does Con. 1 specifically reference? ¶7

ACCTG301 – Widdison – Conceptual Framework                                  5
                      INFORMATION (LEVEL 2)

The hierarchy as displayed in CON 2, Figure 1

                                Pervasive Constraint:     Benefits > Cost

                                        DECISION USEFULNESS

                             TIMELINESS                 VERIFIABILITY         REPRESENTATIONAL
  VALUE           VALUE                                          NEUTRALITY

                             Materiality – (Threshold for Recognition)

What are the characteristics that provide understandability; i.e. provide decision usefulness?

Primary Characteristics:

Relevance –

        ¶ Timeliness – available before loses capacity to influence decision.

        Predictive value – helps to predict outcome of events.

        Feedback value – helps to confirm or correct prior predictions or

ACCTG301 – Widdison – Conceptual Framework                                                       6
Reliability – reasonably free from error or bias
        Representational faithfulness – alignment with underlying economic

        Verifiability – degree of consensus among independent measurers
         using the same method.

        Neutrality – not biased towards a predetermined result
         (See related article: (Critical Nature of Neutral Financial Reporting)
Secondary Characteristics:
Comparability – circumstances treated similarly across businesses at one
point in time.

Consistency – circumstances treated similarly across time for one
Cost-Benefit – the benefit derived from providing the information is greater
than the cost to develop, present, disclose it.
Materiality – the magnitude of an item such that, if omitted or reported
incorrectly, would make a difference in the decision-making process.
Conservatism – where uncertainty exists, prudence should be followed to
ensure that all risks are considered.

Industry Practice – Departure from GAAP allowed under special
Other: (Not depicted in Con 2 figure, but described in the Statement.)
Completeness – inclusion of all material items necessary for faithful
representation of relevant information.

ACCTG301 – Widdison – Conceptual Framework                                    7
                                An Exercise in Decision Usefulness.3

An old friend, Marv.L Us, graduated from Texas A & M with a degree in accounting
several years ago. He has become increasingly interested in advancing his career
opportunities and marketability, so he decides to apply to the UW’s Master of
Professional Accounting program. The application requires that he provide the
following four sets of information:

 His test scores on the Graduate Management Admissions Test (GMAT), a
  standardized test like the SAT except specifically geared towards business
  knowledge/skills. The score must be submitted directly from the testing
  organization to the Department of Accounting admissions office.

 His official undergraduate transcript. Texas A&M registrar’s office must notarize the

 Two letters of recommendation: one written by a superior at his place of current
  employment, the second provided by a professor at his graduating college.

 A handwritten, one-page essay describing his career and academic goals.

Marv. (along with hundreds of other hopefuls with diverse undergraduate education
and work experience) mails in his transcript and recommendation letter. The GMAT
organization mails his test score. The admissions committee uses these pieces of
information to predict who is likely to be successful in the MPACC program. Analyze
the relevance and reliability of each of the four sets of information in this decision
context. You may exclude the feedback value and timeliness components of relevance
from your analysis since we shall assume that the admissions committee has no prior
expectations regarding each applicant and that all items of information arrive before
the admissions committee meets to make its decision.

    Acknowledgment to Professor D. Shores, University of Washington, for this exercise. Adapted by E. Widdison.

ACCTG301 – Widdison – Conceptual Framework                                                                        8

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