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.

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 Bad Boy Records –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

Constraints –Costs might outweigh the benefits  Cost of collecting information  Losing a competitive edge –Materiality  An impact on decision makers  Quantitative & qualitative factors –Industry practices –Conservatism