Chapter 2

Question 1

2 Primary Qualitative Characteristics of Accounting

Answer 1

1. Relevance: Timely, Predictive, and has Feedback Value
2. Faithful Representation: Accurate/Complete, Unbiased/Neutral, and Verifiable/Free from Material Error

Question 2

Primary objective of External Financial Reporting

Answer 2

Provide economic information to external users for decision-making -> Communication vehicle
1. Useful in investment and credit decisions
2. Useful in making resource allocation decisions including assessing management stewardship

Question 3

Secondary qualitative characteristics

Answer 3

1. Comparability: Across businesses
2. Consistency: Over time
3. Understandability
4. Verifiability
5. Timeliness

Question 4

3 Pre-requisites of an asset

Answer 4

1. Past transaction
2. Control
3. Economic benefits

Question 5

Principles of GAAP

Answer 5

1. Separate entity: Transactions of business entity are separate from transactions of owners
2. Going concern/continuity: The entity is expected to continue its operations in the foreseeable future. Justifies the use of cost principles
3. Stable dollar/unit-of-measure: Only include items that can be measured in the national monetary unit/ Purchasing power of the unit does not change over time
4. Time Period: The long life of a company can be reported over a series of short time periods-necessary to prepare annual f/s
5. Historical cost: The cash equivalent cost given up is the basis for the initial recording of financial statement elements. Assets and liabilities are recorded at cost- how much you paid.
6. Objectivity: the amount used in recording transactions is to be based on objective evidence rather than subjective judgments
7. Matching: Requires that revenue and expenses are matched
8. Full disclosure: Events that make a difference to users should be disclosed
9. Revenue recognition: Revenue be assigned to the accounting period in which it is earned

Question 6

Application of the same accounting methods over time

Answer 6

Consistency

Question 7

The information is available prior to the decision

Answer 7

Timeliness

Question 8

The information helps reduce uncertainty in the future

Answer 8

Predictive Value

Question 9

The information provides input to evaluate previous expectations

Answer 9

Confirmatory Value

Question 10

The information allows the evaluation of one alternative against one another & Implies that qualified persons working independently arrive at similar conclusions

Answer 10

Verifiability

Question 11

Agreement between what really happened and the disclosed information

Answer 11

Faithful representation

Question 12

The accounting information does not favor a particular group

Answer 12

Neutrality

Question 13

The information allows the evaluation of one alternative against another

Answer 13

Comparability

Question 14

Application of the same accounting methods overtime

Answer 14

Consistency

Question 15

Elements (2nd level of accounting conceptual framework)

Answer 15

1. Assets
2. Liabilities
3. Equity
4. Revenus
5. Expenses
6. Gains
7. Losses

Question 16

Foundational principles of accounting (The “How” Implementation)

Answer 16

GAAP
1. Economic entity
2. Control
3. Revenue recognition
4. Matching
5. Periodicity
6. Monetary unit (Stable value)
7. Going concern (Continuity)
8. Historical cost
9. Fair value
10. Full disclosure

Question 17

The information has a bearing on a specific decision

Answer 17

Relevance