Accounting Conceptual Framework Statement of Financial Accounting Concepts No. 8, joint project of FASB and IASB “The Objective of General Purpose Financial Reporting,” and “Qualitative Characteristics of Useful Financial Information”

Framework of financial accounting theory and practice Objectives – provide useful information to existing and potential investors, lenders, creditors Types of useful information - return on investment, risk, financial flexibility, liquidity, operating capability Qualitative Characteristics of useful accounting information –decision usefulness, relevance, faithful representation, comparability, verifiability, timeliness, understandability, cost versus benefit Accounting Assumptions and Principles – reporting entity, going concern, period of time, monetary unit, mixed-attribute measurement, recognition, accrual accounting, conservatism Generally Accepted Accounting Principles- guidelines, procedures, practices required by companies in their audited financial statements, included now in a searchable on-line data base of all GAAP called the Accounting Standards Codification Financial Reports -Balance sheet, income statement, statement of cash flows, state-ment of shareholder’s equity, management discussion and analysis MDA), supple-mentary info, notes Elements of Financial statements -accounting equation (assets, liabilities, stockholder’s equity), revenues, expenses, gains, losses; operating, investing, financing cash flows; comprehensive income, investments and rewards concerning owners Framework of financial accounting theory and practice

Objectives of Financial Reporting Provide useful information To project expected returns, cash flows For investors, lenders and creditors Net cash inflows of the company-help project amount, timing, uncertainty Resources and claims of the company Changes in economic resources and claims Net income, comprehensive income Objectives of Financial Reporting Helps investors buy, sell or hold equity investments Helps lenders and other creditors buy, sell or hold debt instruments Existing and potential investors, creditors

Qualitative Characteristics --useful accounting information (top of the chart) Decision usefulness- main objective of financial reporting (investors, creditors), achieve with enough relevance, faithful representation Relevance –predictive, confirmatory value in decision making, material-large enough to make a difference Faithful representation- substance over form (numbers show economic substance), complete representation, neutral representation, accurate representation (free from error)

Qualitative Characteristics-enhancing Comparability – investors, creditors comparing companies, easier with similar accounting methods, consistency--- within companies Verifiability – measurement results can be independently duplicated (consensus, not exact), without error, bias Timeliness -- information when needed, at least yearly Understandability – reasonably knowledgable users can learn info if study diligently

Qualitative Characteristics Cost versus Benefit – (Benefits > Costs) Worthwhile benefits to investors, creditors must justify financial cost of developing and disclosing costs if immaterial, no need to follow the rules! Examples – small tools Qualitative Characteristics Cost constraint

Accounting Assumptions and Principles reporting entity – separate records/reports for each business enterprise, owner versus business, industry, U.S., world going concern- continuity assumption, plan to continue so historical cost valuation ok, depreciation, depletion, amortization --matching, current value not needed (versus quitting concern) period of time- annual reporting (calendar, fiscal year) consistent comparision period monetary unit- use currency of reporting entity – stable dollar Accounting Assumptions and Principles

Accounting Assumptions and Principles (continued) mixed-attribute measurement – US GAAP historical cost main value asset valuation rule to start, other measurements more relevant later- fair value, present value, net realizable value, additional concepts --conservatism recognition – includes revenue recognition – recording revenues when earned. Can also be used to describe recording expenses, assets, etc. accrual accounting – earned revenues, incurred expenses, not tied to cash flows. Timing is important. conservatism – use lower of asset values, use approach giving lowest net income, not misleading but practical -- Losses early, gains later, impairments not appreciation, US GAAP, fiduciary role Accounting Assumptions and Principles (continued)