Lecture Intermediate accounting (Volume 1, 11th Canadian edition) – Chapter 2: Conceptual framework underlying financial reporting

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Lecture Intermediate accounting (Volume 1, 11th Canadian edition) – Chapter 2: Conceptual framework underlying financial reporting. After studying this chapter, you should be able to: Describe the usefulness of a conceptual framework, describe efforts to construct a conceptual framework, understand the objective of financial reporting, identify the qualitative characteristics of accounting information.
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Lecture Intermediate accounting (Volume 1, 11th Canadian edition) – Chapter 2: Conceptual framework underlying financial reporting. After studying this chapter, you should be able to: Describe the usefulness of a conceptual framework, describe efforts to construct a conceptual framework, understand the objective of financial reporting, identify the qualitative characteristics of accounting information..

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KIESO – WEYGANDT – WARFIELD – YOUNG – WIECEK - MCCONOMY INTERMEDIATE ACCOUNTING VOLUME 1 ELEVENTH CANADIAN EDITION Prepared by: Darrin Ambrose CPA, CMA, MBA University of Calgary CHAPTER 2 CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL REPORTING Wiley 2 Chapter 2: Conceptual Framework Underlying Financial Reporting After studying this chapter, you should be able to: 1. Indicate the usefulness and describe the main components of a conceptual framework for financial reporting. 2. Identify the qualitative characteristics of accounting information. 3. Define the basic elements of financial Conceptual Framework Underlying Financial Reporting 4 Usefulness of a Conceptual Framework • The framework is like a constitution; it is a “coherent system of interrelated objectives” • Aids in creation of standards for the accounting profession • Increases financial statement users’ understanding of and confidence in financial reporting • Enhances comparability of financial statements of different companies 5 Objectives of the Conceptual Framework • The framework is the foundation for building a set of accounting concepts and objectives • The framework is a reference of basic accounting theory for solving new and emerging practical problems of reporting 6 Conceptual Framework for Financial Reporting 7 Objective of Financial Reporting • The overall objective of financial reporting is to provide information that is: 1. useful to users (e.g. investors, creditors, etc.), and 2. decision relevant (resource allocation) • Resource allocation decisions are assumed to include assessment of management stewardship (i.e. management role in maximizing shareholder value) • Conceptual building blocks (second level) include: –. qualitative characteristics, and –. elements of financial statements 8 Fundamental Qualitative Characteristics The Fundamental Qualitative Characteristics are: 1. Relevance – Makes a difference in a decision – Has predictive and feedback/confirmatory value – Includes all material information (i.e. information that makes a difference to the decision-maker) 2. Representational Faithfulness – Complete – Neutral – Free from material error 9 Enhancing Qualitative Characteristics Enhancing Qualitative Characteristics are: 1. Comparability – Information measured and reported in similar way (company to company, and year to year) – Allows users to identify real economic similarities and differences 2. Verifiability – Similar results achieved if same methods are used 3. Timeliness 4. Understandability – Allows reasonably informed users to see the significance of the information 10 – Provides “enough” information so that it is clear Trade-offs and Cost/Benefit • Trade-Offs – It is not always possible to have all fundamental and enhancing qualitative characteristics – Trade-offs happen when one qualitative characteristics is sacrificed for another • Cost versus Benefits – Benefits of using the information should outweigh the costs of providing that information 11 Elements of Financial Statements • Basic elements of financial statements include the following: – Assets – Liabilities – Equity – Revenues – Expenses – Gains – Losses 12 Elements of Financial Statements:Assets

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