INTERMEDIATE ACCOUNTING
CHAPTER 2: CONCEPTUAL
FRAMEWORK UNDERLYING FINANCIAL
REPORTING EXAM QUESTIONS WITH
COMPLETE SOLUTIONS
Assets - Answer-Probable future economic benefits obtained or controlled by a
particular entity as a result of past transactions or events
Basic elements - Answer-Financial reporting terms that constitute the language of
accounting and business, such as "assets", "liabilities", and "equity"
Comparability - Answer-What occurs when information that has been measured and
reported in a similar manner for different companies is considered comparable
Completeness - Answer-The quality of accounting information that makes it reliable by
including all information necessary to provide an accurate portrayal of events and
transactions
Comprehensive income - Answer-A measure of income under IFRS that includes net
income plus other comprehensive income
Conceptual framework - Answer-A coherent system of interrelated objectives and
fundamentals that can lead to consistent standards and that prescribes the nature,
function, and limits of financial accounting and financial statements
Conservatism - Answer-A constraint of financial reporting stipulating that, in doubtful
situations, the solution that will least likely overstate assets and income should be
chosen
Consistency - Answer-What occurs when a company applies the same accounting
treatment to similar events from period to period
Constructive obligation - Answer-A type of performance obligation not stated in a
contract that is created through a past practice or by signalling something to potential
customers
Control - Answer-Under ASPE, the continuing power to determine the strategic
operating, financing, and investing policies of another entity without the co-operation of
others
, Under IFRS, the power to direct the activities of another entity to generate returns,
either positive or negative, for the investor
Cost-benefit relationship - Answer-A constraint of financial reporting that the costs of
obtaining and providing information should not be higher than the benefits that were
gained by providing it
Decision-usefulness approach - Answer-Approach to financial reporting whereby the
amount and types of information to be disclosed and the format in which information
should be presented involves determining which alternative provides the most useful
information for decision making purposes
Derecognition - Answer-The process of removing an item from a company's statement
of financial position or income statement
Economic entity assumption - Answer-An assumption that a company's business activity
can be kept separate and distinct from its owners and any other business units
Economic substance - Answer-The underlying economic reality reported on a
representationally faithful document
Equitable obligations - Answer-Commitments that arise from moral or ethical
considerations
Equity - Answer-The residual interest in the assets of a company that remains after
deducting its liabilities
Exit price - Answer-A measure of fair value that represents the amount that a company
would receive on selling an asset or transferring a liability
Expenses - Answer-Decreases in economic resources, either by outflows or reductions
of assets or incurrence of liabilities resulting from a company's ordinary revenue-
generating activities
Fair value option - Answer-The option given to companies allowing them to use fair
value for most financial instruments; under IFRS, certain conditions must be met
Fair value principle - Answer-The GAAP principle that provides guidance regarding how
to measure financial statement elements using best estimates of market values
Feedback/confirmatory value - Answer-The notion that relevant information helps users
confirm or correct prior expectations
Financial engineering - Answer-A process whereby a business arrangement or
transaction is structured legally such that it meets the company's financial reporting
objective (for example, to maximize earnings or minimize a debt-to-equity ratio)
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