Accounting

* Chapter 2 ANSWERS TO QUESTIONS

1. A conceptual framework is 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. A conceptual framework is necessary in financial accounting for the following reasons:
(1) It will enable the FASB to issue moreuseful and consistent standards in the future.
(2) New issues will be more quickly solvable by reference to an existing framework of basic theory.
(3) It will increase financial statement users’ understanding of and confidence in financial reporting.
(4) It will enhance comparability among companies’ financial statements.

2. The primary objectives of financial reporting are as follows:(1) Provide information useful in investment and credit decisions for individuals who have a reasonable understanding of business.
(2) Provide information useful in assessing future cash flows.
(3) Provide information about enterprise resources, claims to these resources, and changes
in them.

3. “Qualitative characteristics of accounting information” are those characteristics whichcontribute to the quality or value of the information. The overriding qualitative characteristic of accounting information is usefulness for decision making.

4. Relevance and reliability are the two primary qualities of useful accounting information. For informa-tion to be relevant, it should have predictive value or feedback value, and it must be presented on a timely basis. Relevantinformation has a bearing on a decision and is capable of making a difference in the decision. Relevant information helps users to make predictions about the outcomes of past, present, and future events, or to confirm or correct prior expectations. Reliable information can be depended upon to represent the conditions and events that it is intended to represent. Reliability stems from representationalfaithfulness, neutrality, and verifiability.

5. In providing information to users of financial statements, the Board relies on general-purpose financial statements. The intent of such statements is to provide the most useful information possible at minimal cost to various user groups. Underlying these objectives is the notion that users need reasonable knowledge of business and financialaccounting matters to understand
the information contained in financial statements. This point is important: it means that in the preparation of financial statements a level of reasonable competence can be assumed; this has an impact on the way and the extent to which information is reported.

6. Comparability facilitates comparisons between information about two different enterprises at a particularpoint in time. Consistency facilitates comparisons between information about the same enterprise at two different points in time.

7. At present, the accounting literature contains many terms that have peculiar and specific meanings. Some of these terms have been in use for a long period of time, and their meanings have changed over time. Since the elements of financial statements are thebuilding blocks with which the statements are constructed, it is necessary to develop a basic definitional framework for them.

8. Distributions to owners differ from expenses and losses in that they represent transfers to owners, and they do not arise from activities intended to produce income. Expenses differ from losses in that they arise from the entity’s ongoing major or central operations.Losses arise from peripheral or incidental transactions.

Questions Chapter 2 (Continued)

9. Investments by owners differ from revenues and gains in that they represent transfers by owners to the entity, and they do not arise from activities intended to produce income. Revenues differ from gains in that they arise from the entity’s ongoing major or central operations. Gains arise from...