FAR 1 - CONCEPTUAL FRAMEWORK

Question 1

What are the 2 general purpose frameworks?

Answer 1

1. GAAP

2. IFRS

Question 2

What are the common special purpose frameworks and who can use them?

Answer 2

Nonpublic entities can use special purpose frameworks which include:

1. cash basis
2. modified cash basis
3. tax basis
4. contractual basis
5. regulatory basis

Question 3

What are the objectives of financial reporting?

Answer 3

To provide users with useful information to make decisions

Question 4

Who are financial reporting users?

Answer 4

investors, lenders, creditors

Question 5

What qualities does financial reporting information have to have in order to be considered useful?

Answer 5

it has to be relevant and faithfully represented

Question 6

What qualities make information relevant?

Answer 6

1. predictability
2. confirmatory
3. material

Question 7

What qualities make information faithfully represented?

Answer 7

1. complete
2. neutral
3. free from error

Question 8

What qualities enhance useful information? What is the overriding constraint?

Answer 8

1. comparability
2. understandability
3. timeliness
4. verifiability

• overriding constraint is cost/benefit analysis. The benefit of having the information must exceed the cost to obtain or procure the information
• IFRS constraints: Cost/benefit & going concern

Question 9

What statement are included in a full set of financials?

Answer 9

1. statement of position
2. state of earnings and comprehensive income
3. statement of cash flows
4. statement of changes in equity

Question 10

The concept of “usefulness” applies to financial elements. What are the 10 financial elements (in accordance with GAAP)

Answer 10

1. assets
2. liabilities
3. equity
4. contributions by owners
5. distributions to owners
6. comprehensive income
7. revenues
8. expenses
9. gains
10. losses

Question 11

The concept of “usefulness” applies to financial elements. What are the 10 financial elements (in accordance with IFRS)

Answer 11

1. assets
2. liabilities
3. equity
4. contributions by owners
5. distributions to owners
6. comprehensive income
7. income
8. expenses

Question 12

What are the items that affect comprehensive income? (DENT)

Answer 12

1. derivative cash flow hedges
2. excess adjustments for pension plans
3. net unrealized gains/losses for AFS securities (*unless fair value method is elected)
4. translation gains/losses

Question 13

What are the 8 rules of accounting?

Answer 13

1. consistency
2. conservatism
3. cost/benefit
4. matching
5. allocation
6. full disclosure
7. recognition
8. realization

Question 14

What are the 3 levels of inputs?

Answer 14

1. Level 1: most reliable, easy identifiable FMV on active markets for exactly the same assets/liabilities
2. Level 2: second reliable, easily identifiable BUT not on active markets, and only on similar assets/liabilities
3. Level 3: least reliable, unidentifiable, management judgement used