1. Concepts - 1 The FASB’s Conceptual Framework of Accounting

2. Concepts - 2 The FASB’s Conceptual Framework How do we determine the amount of information to supply in general- purpose financial statements? –In what format? –Under what assumptions, principles, and constraints?

3. Concepts - 3 The FASB’s Conceptual Framework The FASB’s role is to... –Establish consensus on topical accounting issues. –Interpret accounting principles. –Keep accounting practice as standardized as possible.

4. Concepts - 4 The FASB’s Conceptual Framework  Accounting standards should be consistent with the framework.  New problems can be effectively resolved with reference to the framework.  User can benefit from a more comprehensive understanding of the accounting information in financial statements.

5. Concepts - 5 CONCEPTUAL FRAMEWORK Structure

6. Concepts - 6 SFAC No. 1 “Objectives of Financial Reporting by Business Enterprises”  Target audience... –External users of financial information –Have a reasonable understanding of business and economic activities and are willing to study the information

7. Concepts - 7 SFAC No. 1 Financial Reporting Objectives  Provide information that... useful –Is useful in making rational investment, credit and other related decisions assess future cash flows –Helps assess the amount, timing and uncertainty of future cash flows accurate –Is accurate in reporting the economic resources of the business. earnings –Reports on the entity’s earnings

8. Concepts - 8 SFAC No. 2 “Qualitative Characteristics of Accounting Information” Relevance  Primary Quality... Relevance. –Predictive value –Feedback value –Timeliness

9. Concepts - 9 SFAC No. 2 “Qualitative Characteristics of Accounting Information” Reliability  Primary Quality... Reliability –Verifiability –Neutrality –Representational faithfulness

10. Concepts - 10 SFAC No. 2 “Qualitative Characteristics of Accounting Information” Secondary Qualities Comparability Consistency Comparability and Consistency

11. Concepts - 11 SFAC No. 5 Recognition Criteria  Definition  Measurability  Relevance  Reliability

12. Concepts - 12 SFAC No. 5 Measurement Criteria  Continued use of different attributes (historical cost, current cost, market value, etc.)  All monetary measurement based on nominal units of money.

13. Concepts - 13 SFAC No. 5 Environmental Assumptions  Separate entity assumption  Continuity assumption  Time period assumption  Unit-of-measure assumption

14. Concepts - 14 SFAC No. 5 Implementation Principles  Cost principle  Revenue principle  Matching concept  Full disclosure principle

15. Concepts - 15 SFAC No. 5 Implementation Constraints  Cost-benefit constraint  Materiality constraint  Industry peculiarities constraint  Conservatism constraint

16. Concepts - 16 DOUBLE-ENTRY ACCOUNTING MODEL A = L + OE (Assets) (Liabilities) (Owners’ Equity)

17. Concepts - 17 BASIC ACCOUNTING EQUATION [Corporation] Assets = Liabilities + Stockholders’ Equity Contributed (Paid-in) Capital Retained Earnings Net Income (+) Net loss (-) Dividends (-) Declared Revenues & Gains (+) Expenses & Losses (-) Par Value Excess Over Par

18. Concepts - 18 SFAC No. 6 “Elements of Financial Statements of Business Enterprises” Defines 10 elements of financial statements: Revenues, Expenses, Gains, Losses, Assets, Liabilities, Equity, Investment by owners, Distributions to owners and Comprehensive income. All 10

19. Concepts - 19 SFAC No. 6 Revenues Inflows of assets delivery goodsservices “Inflows of assets or settlements of liabilities during a particular accounting period. Such inflows or settlements stem from delivery or production of goods or rendering of services”

20. Concepts - 20 SFAC No. 6 Expenses Outflows of assets l “Outflows of assets or incurrences of liabilities during a particular accounting period. Such delivery goodsservices l Such outflows are necessary to delivery or production of goods or rendering of services.” l Assets consumed (or liabilities incurred) in an attempt to generate revenue

21. Concepts - 21 SFAC No. 6 Gains and Losses Gains Gains: “Increases to equity resulting from incidental transactions not associated with the company’s major business.” Losses Losses: “Decreases to equity resulting from incidental transactions not associated with the company’s major business.”

22. Concepts - 22 SFAC No. 6 Assets and Liabilities Assets Assets: “Business resources that have probable future economic benefits.” Liabilities Liabilities: “Probable future sacrifices of economic benefits.”

23. Concepts - 23 Equity SFAC No. 6 Equity l Residual interest l Residual interest in the assets of a business entity. l Also known as net assets. l Represents amount “invested” by shareholders

24. Concepts - 24 SFAC No. 6 Investments and Distributions Investments by owners Investments by owners: “Increases to equity resulting from asset contribution by other entities (owners/stockholders).” Distribution to owners Distribution to owners: “Decreases to equity resulting from the distribution of assets to other entities.”

25. Concepts - 25 SFAC No. 6 Comprehensive Income except for “The change in equity resulting from the aggregate of all transactions reported in a particular accounting period, except for investments by and distributions to owners.”

26. Concepts - 26 End of Discussion of Concepts