Predictive value
Information is useful in predicting the future
Relevance
Pertinent to the decision at hand; must possess predictive value and/or confirmatory value
Timeliness
Early enough to allow them to use it in their decision process; Information is available prior to the decision
Distribution to owners
Decreases in equity resulting from transfers to owners
Confirmatory value
Information confirms expectations
Understand-ability
Users understand the information in the context of the decision being made
Gain
Increase in equity from peripheral or incidental transactions; Results if an asset is sold for more than its book value
Faithful representation
Be complete neutral and free from material error; agreement between a measure and the phenomenon it purports to represent
Comprehensive income
The change in equity from non-owner transactions
Materiality
Will it make a difference; Concerns the relative size of an item and its effect on decisions; a consequence is that GAAP need not be followed in all situations
Comparability
Helps users see similarities and differences between events and conditions; Important for making inter-firm comparisons
Neutrality
The absence of bias
Recognition
The process of admitting information into financial statements
Consistency
Applying the same accounting practices over time
Cost effectiveness
Requires consideration of the cost and value of information; the benefits of providing accounting information should exceed the cost of doing so
Verifiability
Implies consensus among different measures
Matching principle
Record expenses in the period the related revenue is recognized; cause and effect relationship between revenues and expenses
Periodocity
The life of an enterprise can be divided into artificial time periods; relates to qualitative characteristic of timeliness
Historical cost principle
The original transaction value upon acquisition; the basis for measurement of many assets and liabilities
Materiality
Concerns the relative size of an item and its effect on decisions
Realization principle
Revenue is recognized only after a certain criteria are satisfied; criteria usually satisfied at point of sale
Going concern assumption
The entity will continue indefinitely;
Monetary unit assumption
A common denominator is the dollar; inflation causes a violation of this assumption
Economic entity assumption
The enterprise is separate from its owners and other entities; all economic events can be identified with a particular entity
Full-disclosure principle
All information that could affect decisions should be reported
Conservatism
Practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered; Not a qualitative characteristic, but a practical justification for some accounting choices
Statements of Financial Accounting Concepts issued by FASB:
Identify the conceptual framework within which accounting standards are developed
In general, revenue is recognized as earned when the earning process is virtually complete and:
there is reasonable certainty as to the collectibility of the asset to be received
Conceptual framework
a constitution, coherent system of interrelated objectives and fundamentals; consistent standards
Decision usefulness
the ability to be useful in decision making
Financial reporting
Tells a company's economic position, neutral
Elements of Financial Statements (10)
1) Assets
2) Liabilities
3) Equity (or net assets)
4) Investments by owners
5) Distribution to owners
6) Comprehensive income
7) Revenues
8) Expenses
9) Gains
10) Losses
Expenses
Outflows or other using up of assets or incurrences of liabilities
Revenues
Inflows or other enhancements of assets of an entity or settlements of its liabilities
Losses
Represent decreases in equity arising from peripheral or incidental transactions of an entity
Investment by owners
Increase in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interest
Economic entity
All economic events can be identified with a particular economic entity
SFAC 6
Defines 1- elements of financial statements
When should an item be recognized in the basic financial statements (4)
1) Definition: item meets the definition of an element of financial statments
2) Measurability - item has relevant attribute measurable with sufficient reliability
3) Relevance - information about it is capable of making a difference in users decisions
4)
SFAC 5
Tells when an item should be recognized in the basic financial statements