Define relevance and its components. What is an example of financial reporting information that has both of these components? - Relevance means it is capable of making a difference in user's decision making. It can have confirmatory value (confirm or correct prior expectations) or predictive value ...
to those resources, and the effects of
ACC 356 Exam 1 transactions, events, and
Questions and circumstances that change resources
and claims to those resources
Solutions 2024
Financial reporting should provide
Define relevance and its components. information that help capital providers
What is an example of financial assess: - 1. Amounts, timing, and
reporting information that has both of uncertainty of prospective net cash
these components? - Relevance means inflows to the firm
it is capable of making a difference in 2. Management's ability as a steward
user's decision making. It can have of resources
confirmatory value (confirm or
correct prior expectations) or Why accrual accounting? - Accrual
predictive value (help predict future accounting more closely tracks the
outcomes). Revenue has both of these occurrence of transactions and other
components. events and circumstances that have
affected the entity's wealth during the
Define representational faithfulness period
and its components. - A depiction of
an item in the financial statements What are the important elements of
faithfully represents what it purports the FASB's definition of an asset? - 1.
to represent. This means it must be Probable future economic benefits
complete, neutral, and free of material 2. Arisen from a past transaction
error. 3.Entity can control (obtain benefits
and prevent others from accessing
What characteristics enhance those benefits)
usefulness of the financial statement
item? - Comparability: allows users to What are the important elements of
detect and explain similarities and the FASB's definition of a liability? -
differences 1. Probable future sacrifice
Verifiability: ability to ensure that 2. Transaction or obligating event has
info represents what it purports to already occurred
represent (or without bias) 3. Little or no discretion to avoid the
Timeliness: Information is available future sacrifice as present obligations
before it loses capacity to make a
difference What are important elements of the
Understandability: Info can be FASB's definition of an expense? - 1.
understood (Enron example) No probable, controllable future
benefits or
Financial reporting should provide 2. They cannot be measured in a
information... - About the economic relevant and reliable way
resources of an enterprise, the claims
, lOMoAR cPSD| 44479283
What is a constructive liability? Give sheet elements
an example. - It may not be 2. Measurability: Has relevant
enforceable legally, but based upon attribute measurable with sufficient
customs, social norms, or past reliability
behavior. Example is a yearly bonus. 3. Relevance: Information is capable
of making a difference in decisions
What is the FASB's definition of 4. Reliability: Information is
owners' equity? - The residual interest representationally faithful, neutral,
in assets after liabilities have been and complete
subtracted.
What are the possible attributes that
How did FASB deal with uncertainty might be used for measuring an asset?
over future resource inflows and - 1. Historical cost
outflows in the definition of assets 2. Current cost
and liabilities? - They use "probable" 3. Current market value
to modify future benefits in the 4. Net realizable value
definition of an asset and future 5. PV of discounted cash flows
sacrifices in the definition of a
liability What are 3 ways in which expenses
are recognized? - When an asset's
Why is uncertainty such a central economic benefit has been used up, or
issue? - Users want information to when previously recognized assets are
help predict future outcomes and expected to provide reduced or no
events, which involves uncertainty. If further benefits.
there weren't uncertainty, accounting Can occur as a result of:
would require far less judgement, but 1. Directly matching costs with
there would be little demand for revenue recognized (COGS)
financial reporting. 2. Expensing in the period the cash is
spent or liability is incurred (Utility
What is the role of recognition expense)
criteria? - To cope with uncertainty 3. Allocating the cost of the asset
and enhance the reliability of the being consumed to the periods that
balance sheet. Therefore, it provides a benefit (Depreciation)
minimum acceptable threshold of
reliability that must be achieved Executory contract - An unfulfilled
before an asset, liability, revenue, or contract by both parties (both promise
expense will be put in financial to do something, but nothing has
statements. happened)
Ex: *leases, **purchase
According to FASB's conceptual commitments, **service contracts.
framework, what are the fundamental *Any lease with 12 month term or
recognition criteria? - 1. Definition: longer will record this as an asset
Item meets the definition of balance when executory contract is signed.
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