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Intermediate Accounting — 1

Chapter 2
Conceptual Framework for Financ
ial Reporting

Stewardship: Is an ethic that emb

odies the responsible planning and
resources. The concepts of steward management of
ship can be applied to the enviro
economics, health, property, info nment and nature,
rmation. Basically, stewardship rep
the financial statement reader orting focuses on showing
just how the resources entrusted in
where managed (transparen’y the managements care
and full disclosure are required). For
expenditures could be expensed example: some of the
or capitalized as an asset and amo
fund reporting. rtized. For example, mutual

Relevance: it is considered one

of the most important characteristics
financial information reported because it means that the
by the company must be useful for
decision making
Faithful representation: The
accounting information represent
should be reported based on ed in the financial statements
the economic substance (substance
For example, if two companies over form) of the transaction.
swap their inventories they will not
because no sales have occurre be allowed to record sales
d, even if they have entered into
Faithful representation has thr valid enforceable contracts.
ee sub components
- Completeness: The information
reported in’the financial statement
or deceive the readers. All info s should not mislead
rmation relating to the transactio
- Neutrality; Financial reports n should be included.
should be neutral, they should not
decision or judgements to ach influence a user’s
ieve an intended outcome (freedo
- Freedom from material error: m from bias)
The financial reports presented sho
uld be reliable.
Comparability: The financial
reports should be consistent, Le.
policies from year to year and , using the same accounting
uniform, i.e., information should
similar way from company to be measured and reported in
Verifiability: if independent
users can measure an economic
(cash at bank) event and arrive at the same resu

Timeliness: Accounting info

rmation should be reported soo
decision making (semi-annually, n enough for it to be useful for

Prepared by: Charanjit Singh

tandable to its
Understandability: Financial reports should include information that is unders
readers (quality and clarity)
or tement would
Materiality: Information is considered to be material if its omission missta
influence the user’s decision (for example, income from continuing operati
ure should result in
Cost vs benefit trade-off: Basically, any accounting measurement or disclos
ting benefits
a greater benefit to its users than the cost. Benefits should exceed costs. Estima
could be little complicated in some cases (such as auditing, disclosure of inform
ting an asset or liability
Revenue recognition vs realization: Realization is the process of conver
sale is
into cash inflow or outflow for the company. Revenues are recognized when a credit
made but not realized until cash has been collected. Once realization has taken
ignored. For
recognition must occur, just because there has been a cash flow which cannot be

- A company pay a retainer to a lawyer who will be working for the company for the next
fiscal year. Since there has been a cash outflow, this causes realization which in turn
cause recognition as a prepaid expense

However, recognition could also take place before realization. For example

- Purchase of inventory on credit will trigger recognition. But realization will take place
when creditor is pair

Prepared by: Charanjit Singh

CHAPTER 2 Accounting Judgements


Organizational Facts
Reporting Constraints
F/S users; covenants;
(e.g., regulations; audit
economic factors) (Chapter 1) requirements)

Underlying Assumptions
Universal assumptions: Entityspecific assumptions:
Time period . Continuity
Separate ntity Proprietary application
Unit of measure Stable currency

Qualitative Characteristics
Measurement Methods
Fundamental qualities: • Historical cost, Fair value,
Relevance Net realizable value, LCM
Representational Faithfulness • Accrual, Interperiod
Enhancing qualities: allocation
Comparability • Recognition, Realization
Pervasive constraints:
Cost/Benefit *

Accounting Choice Decisions

Policies, Measurement methods, Estimates, Disclosures

Elements of Financial Statements

• Assets, Liabilities, Owners’ equity
• Revenues, Expenses, Gains, Losses
• Other comprehensive income

Financial Statements
• Income Statement (Chapter 3)
• Statement of Comprehensive Income (Chanter 3)
• Statement of Ftnancial Position (Chapter 4
• Statement of Changes in Equity (Chapter 4)
• Statement of Cash Flows (Chapter 5)