Objective of Financial Reporting
Goal for financial accounting and reporting, established by the accounting profession, which is to provide information about the reporting entity that is useful to present and potential to equity investors, leaders, and other creditors in decisions about
Qualitative Characteristics
Part of the second level of conceptual framework of accounting; the characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes. The primary qualitative c
Relevance
One of the qualitative characteristics of accounting information, which describes information capable of making a difference in a decision. Information with no bearing on a decision is irrelevant. To be relevant, information needs have predictive or feedb
Predictive Value
One characteristic of relevant information, indicating that information must help users predict the ultimate outcome of past, present, and future events.
Confirmatory Value
One of the ingredients of the fundamental quality of relevance, it helps to confirm or correct prior expectations based on previous evaluations of financial reporting information.
Materiality
A company-specific aspect of relevance, an item is said to be material if its inclusion or omission would influence or change the judgement of a reasonable person; it is immaterial, and therefore irrelevant if it would have no impact on a decision-maker.
Faithful Representation
One of the qualitative characteristics of accounting information. Information must be complete, free from error, and neutral.
Completeness
One of the ingredients of fundamental quality of faithful representation. It means that all the necessary for faithful representation is provided.
Neutrality
One of the ingredients of fundamental quality of faithful representation, neutrality indicates that a company cannot select information to favor one set of interested parties over another. Unbiased information must be the overriding consideration.
Free From Error
View that information that is accurate will be more representationally faithful.
Comparability
An enhancing qualitative characteristic of accounting information, which describes information that is measured and reported in a similar manner for different companies. Comparability enables users to identify the real similarities and differences in econ
Consistency
An aspect of comparable information, which indicates that a company applied the same accounting treatment to similar events from period to period. A company can change methods, but it must first demonstrate that the newly adopted method is preferable to t
Verifiability
An enhancing qualitative characteristic of accounting information, indicating that similar results will occur when independent third parties measure using the same methods.
Timeliness
An enhancing qualitative characteristic of accounting information, indicating that information should be available to decision-makers before it loses its capacity to influence their decisions.
Understandability
An enhancing qualitative characteristic of accounting information that lets reasonably informed users see its significance.
Assumption
One of the parts in the third level of the conceptual framework; a concept that the accounting profession assumes as foundational for the financial accounting structure. There are four basic assumptions: Economic Entity, Going Concern, Monetary Unit, and
Economic Entity Assumption
An assumption that economic activity can be identified with a particular unit of accountability, by keeping an enterprise's economic activity separate and distinct from that of its owners and any other business unit. The entity assumption refers to econom
Going Concern Assumption
Accounting assumption that a company will continue in operation for the foreseeable future. Only in situations in which liquidation appears imminent is the assumption inapplicable.
Monetary Unit Assumption
Accounting assumption that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
Periodicity (Time Period) Assumption
Accounting assumption that implies that a company can divide its economic activities into artificial time periods. These time periods vary, but the most common are monthly, quarterly, and yearly.
Historical Cost Principle
An accepted accounting principle that companies account for and report most assets and liabilities on the basis of acquisition price. To the extent that historical cost is free from error and neutral, it contributes to faithful representation.
Fair Value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair Value Principle
GAAP-based principle that calls for the use of fair value measurements in the financial statements.
Fair Value Option
The choice allowed by the FASB to use fair value in the financial statements as the basis of measurement for financial assets and liabilities. The item is recorded at fair value at each reporting date, and unrealized holding gains or losses are reported a
Revenue Recognition Principle
One of the basic principles of accounting, which dictates that companies recognize revenue in the accounting period in which the performance obligation is satisfied. Generally, recognition at the time of sale provides a uniform and reasonable test.
Expense Recognition Principle
Accounting principle that dictates that the recognition of expenses is related to net changes in assets and earning revenues, that is, "let the expense follow the revenues.
Product Costs
Costs that attach to a specific product. Examples are material, labor, and overhead. Companies carry product costs into future periods if they recognize the revenue from the product in subsequent periods.
Period Costs
Costs that attach to a specific accounting period. Examples are officers' salaries and other administrative expenses. Companies charge off such period costs in the immediate period, even though benefits associated with these costs may occur in the future.
Full Disclosure Principle
Accounting principle that dictates that in deciding what information to report, companies follow the general practice of providing information that is of sufficient importance to influence the judgement and decisions of an informed user. It recognizes tha
Financial Statements
Are the balance sheet, income statement, statement of cash flows, and statement of owners' equity.
Cost Constraint
An accounting constraint that requires that the costs of providing financial information be weighed against the benefits that can be derived from using it. The constraint applies to informations requirements established by standard-setting bodies and gove
Prudence
The convention in accounting that dictates that when in doubt, choose the solution that will be least likely to overstate assets and income.
Supplementary Information
Information included in the notes to financial statements, which includes details or amounts that present a different perspective from that adopted in the financial statements. It may be quantifiable information that is high in relevance but low in reliab
Conceptual Framework
For the accounting profession, a coherent system of objective and fundamentals established by the FASB, which determine the nature, function and limits of financial accounting and which lead to consistent accounting standards.