Constraint and Present Value

Question 1

List the elements included in a full set of financial statements.

Answer 1

• Balance sheet
• Income statement
• Statement of comprehensive income
• Statement of cash flows
• Statement of owner’s equity

Question 2

List the elements which a present value measurement that fully captures economic differences should include.

Answer 2

• An estimate of future cash flows
• Expectations about variations in amount or timing of those cash flows
• Time value of money as measured by the risk‐free rate of interest
• The price for bearing the uncertainty inherent in the asset or liability
• Any other relevant factors

Question 3

What is the constraint in setting accounting standards?

Answer 3

Cost effectiveness (or cost‐benefit)

Question 4

What is Conservatism?

Answer 4

Conservatism (also called prudence) is the reporting of less optimistic amounts (lower income, net assets) under conditions of uncertainty or when Generally Accepted Accounting Principles (GAAP) provides a choice from among recognition or measurement methods.

Question 5

Define “cost effectiveness.”

Answer 5

This constraint on generally accepted accounting principles (GAAP) limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 6

What does a fresh start measurement do?

Answer 6

Establishes a new carrying value after an initial recognition and is unrelated to previous amounts (e.g., mark‐to‐market accounting and recognition of asset impairments)

Question 7

What is cost effectiveness?

Answer 7

This constraint on generally accepted accounting principles (GAAP) limits recognition and disclosure if the cost of providing the information exceeds its benefit.

Question 8

What are the four criteria that must be met to be recognized and measured in a financial report?

Answer 8

1. Definition
2. Measurability
3. Relevance
4. Faithful representation