Chapter 2 Financial Reporting Its Conceptual Framework

1、2 Financial Reporting: Its Conceptual FrameworkAccounting School Zhongnan University of Economics & LawI 中級會計學(xué) Intermediate Accounting 2 Financial Reporting: Its Conceptual Framework1. FASB conceptual framework FASB was given two charges: To develop a conceptual framework of accounting theory. T

2、o establish standards (GAAP) for financial accounting practices. Intermediate Accounting 2 Financial Reporting: Its Conceptual Framework To guide the FASB in establishing accounting standards. To provide a frame of reference for resolving accounting questions in situations where a standard does not

3、exist. To determine the bounds for judgment in the preparation of financial statements. Intermediate Accounting 2 Financial Reporting: Its Conceptual Framework To increase users understanding of and confidence in financial reporting. To enhance comparability. Intermediate Accounting 2 Financial Repo

4、rting: Its Conceptual Framework Concepts Statement No. 1Objectives of Financial Reporting by Business Enterprises(Issue Date 11/78) Concepts Statement No. 2Qualitative Characteristics of Accounting Information(Issue Date 5/80) Intermediate Accounting 2 Financial Reporting: Its Conceptual Framework C

5、oncepts Statement No. 3Elements of Financial Statements of Business Enterprises(Issue Date 12/80, replaced by No. 6 in 1985) Concepts Statement No. 4Objectives of Financial Reporting by Nonbusiness Organizations(Issue Date 12/80) Intermediate Accounting 2 Financial Reporting: Its Conceptual Framewor

6、k Concepts Statement No. 5Recognition and Measurement in Financial Statements of Business Enterprises(Issue Date 12/84) Concepts Statement No. 6Elements of Financial Statementsa replacement of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement No. 2) (Issue Date 12/

7、85) Intermediate Accounting 2 Financial Reporting: Its Conceptual Framework Concepts Statement No. 7Using Cash Flow Information and Present Value in Accounting Measurements(Issue Date 2/00) Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkConceptual FrameworkTermsPurposeDocumen

8、ts Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkStandard SettingFrom Objectives and ConceptsStandardsEstablish methods and procedures for measuring, summarizing, and communicating financial accounting information to external users.Statements of Financial Accounting Concepts

9、Statements of Financial Accounting Standards Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkConceptual Framework OverviewObjectivesof FinancialReportingQualitativeCharacteristicsof AccountingInformationElementsof FinancialStatements Recognition and Measurement ConceptsAssumpt

10、ionsPrinciplesConstraints Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkFinancial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.Usefulness Inte

11、rmediate Accounting 2 Financial Reporting: Its Conceptual FrameworkFinancial reporting should provide information that is understandable to one who has a reasonable knowledge of accounting and business and who is willing to study and analyze the information presented.Understandability Intermediate A

12、ccounting 2 Financial Reporting: Its Conceptual FrameworkWhile there are many potential users of financial reports, the objectives are directed primarily toward investors and creditors.Target Audience Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkFinancial reporting should p

13、rovide information that is useful in assessing amounts, timing, and uncertainty (risk) of prospective cash flows.Assessing Future Cash Flows Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkFinancial reporting should also provide information about an enterprises assets, liabili

14、ties, and owners equity to help investors, creditors, and others evaluate the financial strengths and weaknesses of the enterprise and its liquidity and solvency.Evaluating Economic Resources Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkInformation about enterprise earnings

15、, measured by accrual accounting, generally provides a better basis for forecasting future performance than does information about current cash receipts and disbursements.Primary Focus on EarningsReturn on investment provides a measure of overall company performance.Risk is the uncertainty of unpred

16、ictability of the future results of a company.Financial flexibility is the ability of a company to take effective actions to change the amounts and timing of cash flows.Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkLiquidity is the term used to describe how quickly an asset

17、can be converted into cash or a liability paid.Operating capability refers to the ability of a company to maintain a given physical level of operation.Intermediate Accounting 2 Financial Reporting: Its Conceptual Framework Intermediate Accounting 2 Financial Reporting: Its Conceptual Framework3. Qua

18、litative characteristics of accounting informationFASB Statement of Financial Accounting Concepts No. 2 specifies qualitative characteristics of accounting information that accounting information should possess in order to be most useful. Different from China, FASB has set hierarchy of qualitative c

19、haracteristics. RelevanceReliabilityAccounting InformationUnderstandabilityDecision UsefulnessIntermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkPredictive ValueFeedback ValueTimeli-nessVerifi-abilityRepresenta-tional faithfulnessNeu-tralitySecondary and Interactive QualitiesComp

20、arability (including ConsistencyThreshold for RecognitionIntermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkRelevance: making a differenceIntermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkPredictive Value Helps a decision maker predict future consequences bas

21、ed on information about past transactions and events.Feedback ValueHelps to confirm or change a decision makers beliefs based on whether the information matches what was expected.Timeliness Quality of information that is provided on a timely basis. Intermediate Accounting 2 Financial Reporting: Its

22、Conceptual FrameworkReliability Verifiability Reported information should be based on objectively determined facts that can be verified by other accountants using the same measurement methods. Representational Faithfulness The amounts and descriptions reported in the financial statements should refl

23、ect the actual results of economic transactions and events. Neutrality The information should be presented in an unbiased manner; fairness.Free from error and represents what it claims to represent. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkComparability Comparability re

24、quires that similar events be accounted for in the same manner on the financial statements of (1) different companies and (2) for a particular company for different periods (consistency). Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkMateriality Is the item large enough to i

25、nfluence the decision of a user of the information? Intermediate Accounting 2 Financial Reporting: Its Conceptual Framework4. Accounting assumptions and conventionsCertain assumptions and conventions have influenced the development of generally accepted accounting principles. These are similar with

26、those of China. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkEntityThe entity assumption assumes that a proprietorship, partnership, or corporations financial activities are distinguished from other financial organizations in keeping its own financial records and reports. I

27、ntermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkContinuity This assumption assumes that the company will continue to operate in the near future, unless substantial evidence to the contrary exists. This assumption is also known as the going-concern assumption. Intermediate Accou

28、nting 2 Financial Reporting: Its Conceptual FrameworkPeriod of TimeIn accordance with the period-of-time assumption, a company prepares financial statements at the end of each year and includes them its annual report. The period-of-time assumption is the basis for the adjusting entry process at peri

29、od-end. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkMonetary Unit This assumption states that there must be some basis for measuring exchange of goods or services. Currently the dollar is considered to be a stable monetary unit for preparing a companys financial statements

30、. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkHistorical CostUsually, the exchange price is retained in the accounting records as the value of an item until it is removed from the records. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkRealization a

31、nd RecognitionRealization is the process of converting noncash resources and rights into cash or rights to cash. Recognition is the process of formally recording and reporting an item in the financial statements of a company. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkMat

32、ching and Accrual AccountingThe matching principle states that to determine the income of a company for an accounting period, the company computes the total expense involved in obtaining the revenues of the period and relates these total expenses to the total revenues recorded in the period. Interme

33、diate Accounting 2 Financial Reporting: Its Conceptual FrameworkConservatismThe conservatism convention states that when alternative accounting valuations are equally possible, the accountant should select the one that is least likely to overstate assets and income in the current period. Intermediat

34、e Accounting 2 Financial Reporting: Its Conceptual Framework5. Elements of financial statements Main financial statements: Balance Sheet Income statement Statement of Cash Flows Statement of Changes in Equity Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkElements of a balanc

35、e sheetAssets are the probable future economic benefits obtained and controlled by a company as a result of past transactions or events.Liabilities are the probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the futu

36、re as a result of past transactions or events.Equity is the owners residual interest in the net assets of a company. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkElements of Income StatementRevenues are inflows or other enhancements of assets of a company or settlement of i

37、ts liabilities during a period from delivering or producing goods, rendering services, or other activities that are the companys ongoing major operation. Revenues increase the equity of a company. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkElements of Income Statement Exp

38、enses are outflows or other using up of assets of a company or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that are the companys ongoing major operation. Expenses decrease the equity of a company. Intermediate Acc

39、ounting 2 Financial Reporting: Its Conceptual FrameworkElements of Income Statement Gains are increases in the equity of a company from peripheral or incidental transactions and from all other transactions and other events and circumstances affecting the company, except those that result from revenues or investments by owners. Gains increase the equity of a company. Intermediate Accounting 2 Financial Reporting: Its Conceptual FrameworkElements of Income Statement Losses are decrease