CHAPTER 2 Conceptual Framework Underlying Financial Accounting ……..…………………………………………………………...  Coherent system  Objectives & characteristics  Principles & assumptions Conceptual Framework  Within which rules and standards are developed

Useful Information Unbiased Historical Cost Principle Record plant assets at historical cost. Basic objectives Qualitative characteristics Basic principles Accounting standards Levels within the Framework

FIRST LEVEL: BASIC OBJECTIVES  Information useful to stockholders and creditors  Helpful in assessing amount and timing of future cash flows  Information regarding assets and liabilities

SECOND LEVEL: FUNDAMENTAL CONCEPTS Qualitative Characteristics Useful ReliableRelevant ComparableConsistent

Relevant Timely Predictive Value Feedback Value Reliable UnbiasedVerifiable Faithful Representation

Assets -= LiabilitiesEquity Basic Elements Owner Investment Decrease in Net Assets Comprehensive Income Distribution to Owners Increase in Net Assets Expenses Losses Revenues Gains

THIRD LEVEL: RECOGNITION AND MEASUREMENT CONCEPTS Basic Assumptions –Economic entity –Going concern –Monetary unit –Periodicity $ $

Basic Principles –Historical cost Assets & liabilities recorded at historical cost Verifiable Unbiased Exceptions: investments receivables inventories –Revenue recognition Recognized when realized and earned. Faithful representation Exceptions: long-term contracts minerals installment sales

–Matching “Let the expense follow the revenues.” Predictive & Feedback value When there is no connection: rational allocation expense immed. –Full disclosure Detail and condensation for informed decisions. Predictive & Feedback value 3 sources: financial stmnts notes supplementary info

Exceptions to the Rules –Costs outweigh the benefits  Cost of collecting information  Losing a competitive edge –Amounts are immaterial  An impact on decision makers  Quantitative & qualitative factors –Special industry practices –Conservatism

Exercise 2-5 (b)Lower of cost or market is used to value inventories (e)Repair tools are expensed when purchased (h)All important aspects of bond contracts are reported instead of historical cost. rather than being recorded as assets and depreciated., not just the amount of the bond.