Chapter 2 Conceptual Framework for Financial Reporting LO 2.1 Describe the usefulness of a conceptual framework.

A _____________________ in accounting is important because rule-making should be built on and relate to an established body of concepts.

The benefits of a soundly developed conceptual framework are as follows: a) ______________________________________________________ b) ______________________________________________________

Which of the following is not true concerning a conceptual framework in accounting? A. It should be a basis for standard-setting. B. It should allow practical problems to be solved more quickly by reference to it. C. It should be based on fundamental truths that are derived from the laws of nature. D. All of these answer choices are true.

LO 2.2 Understand the objective of financial reporting. To provide financial information about the reporting entity that is _______________ to present and potential equity _________________________________in making decisions about providing resources to the entity.

In other words the objective is __________________________________________________________ _______________________________________________________________________________.

LO 2.3 Identify the qualitative characteristics of accounting information. The qualitative characteristics of accounting information distinguish better and more useful information from inferior and less useful information.

a.Fundamental qualities of useful accounting information.

Relevance. __________________________________________________________________________ _____________________________________________________________________________________

(a)Predictive value.: ________________________________________________________ _____________________________.

(b)Confirmatory value: ____________________________________________________ _____________________________.

(c)Materiality.: ____________________________________________________ _____________________________.

Faithful Representation._______________________________________________________________ ____________________________________________________________________________________

(a)Completeness _________________________________________________________

(b)Neutrality _______________________________________________________

(c)Free from error ___________________________________________________

b.Enhancing Qualities Enhancing qualities complement the fundamental qualities and include:

Comparability __________________________________________________________________.

Consistency _____________________________________________________________________ ________________________________________________ Verifiability __________________________________________________________________.

Timeliness __________________________________________________________________. Understandabili__________________________________________________________________ ___________________________________________________

Select the qualitative characteristics for the following statements.

(a) Quality of information that assures users that information represents the economic phenomena that it purports to represent.

(b) Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.

(c) The extent to which information is accurate in representing the economic substance of a transaction.

(d) Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.

(e) Quality of information that allows users to comprehend its meaning.

SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint.

(a) What is the quality of information that enables users to confirm or correct prior expectations?

(b) Identify the pervasive constraint developed in the conceptual framework.

(c) The chairman of the SEC at one time noted, If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined. Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.)

(d) Muruyama Corp. switches from FIFO to averagecost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?

(e) Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.)

(f) What are the two fundamental qualities that make accounting information useful for decisionmaking?

(g) Watteau Inc. does not issue its first-quarter report until after the second quarters results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

(h) Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes?

(i) Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed?

(j) Roddick Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use relevance or faithful representation.)

If the LIFO inventory method was used last period, it should be used for the current and following periods because of A. consistency. B. verifiability. C. materiality. D. timeliness.

According to the FASB's conceptual framework, what does the concept of faithful representation include? A. Predictive value B. Materiality C. Verifiability D. Neutrality

Which of the following is not a basic assumption underlying the financial accounting structure? A. Going concern assumption B. Economic entity assumption C. Historical cost assumption D. Periodicity assumption

Under current GAAP, inflation is ignored in accounting due to the A. periodicity assumption. B. economic entity assumption. C. going concern assumption. D. monetary unit assumption.

Valuing assets at liquidation values rather than cost is inconsistent with the A. historical cost principle. B. materiality constraint. C. periodicity assumption. D. expense recognition principle.