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Chapter 2: 3CA (page 69)

Homer Winslow and Jane Alexander are discussing various aspects of the FASB鈥檚 concepts statement on the objective of financial reporting. Homer indicates that this pronouncement provides little, if any, guidance to the practicing professional in resolving accounting controversies. He believes that the statement provides such broad guidelines that it would be impossible to apply the objective to present-day reporting problems. Jane concedes this point but indicates that the objective is still needed to provide a starting point for the FASB in helping to improve financial reporting.Instructions

  1. Indicate the basic objective established in the conceptual framework.
  2. What do you think is the meaning of Jane鈥檚 statement that the FASB needs a starting point to resolve accounting controversies?

Short Answer

Expert verified
  1. The primary objective is to supply accounting information about the reporting organization beneficial to existing and capable equity investors, lenders, and other users in creating decisions about supplying resources to the organization.
  2. The objective of this statement is to describe the fundamentals on which reporting standards and financial accounting may be dependent. Without a few definite sets of objectives agreeable to all, uncertain standards will be advanced.

Step by step solution

01

Meaning of Financial Reporting

Financial reporting is a structured method of listing and displaying a firm鈥檚 accounting data. The reports show a company鈥檚 financial health and accomplishments in a particular period.

02

Explanation for statement ‘a’

The fundamental purpose is to supply accounting information to the reporting entity that is fruitful for investors, lenders and creditors in preparing decisions about supplying resources to the organization. Homer Winslow and Jane Alexander argue over different features of the Financial Accounting Standards Board (FASB) concepts statement that has been developed with the motive of improving financial reporting. Homer shows that this declaration supplies less support to the practitioners in handling accounting controversies. He shows that the statement supplies such broad guidelines that it would not be possible to use the objective for solving existing-day reporting issues. Jane acknowledges this point, but shows that the motive or objective of the statement is still required to supply a beginning point for the FASB to enhance financial reporting.

03

Explanation for statement ‘b’

This statement aims to set out the principles on which financial accounting and reporting standards may be dependent. Erratic standards will be advanced without a basic set of objectives agreeable to everyone. For instance, a few believe that accountability should be the basic purpose of financial reporting. Others say that anticipation of future cash flows is vital. It follows that individuals who affirm that responsibility is the fundamental objective may arise at various financial reporting standards than others who argue for anticipation of cash flow. Merely by setting up a few uniform beginning points, accounting can never claim basic consistency in setting up accounting principles.

The Board itself can be an important user and, therefore, the most direct recipient of the support provided by this declaration. However, the knowledge of the purposes and methods the Board used should allow everyone keen on financial accounting standards to easily understand the content and demerits of information supplied by financial accounting and reporting, thereby improving their capability to use that information efficiently and improving confidence in financial accounting and reporting.

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Most popular questions from this chapter

Discuss whether the changes described in each of the cases below require recognition in the CPA鈥檚 audit report as to consistency. (Assume that the amounts are material).

  1. The company changed its inventory method to FIFO from weighted-average, which had been used in prior years.
  2. The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years.
  3. The estimated remaining useful life of plant property was reduced because of obsolescence.

E2-4 (L03) (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows.

Relevance Neutrality Verifiability

Faithful representation Completeness Understandability

Predictive value Timeliness Comparability

Confirmatory value Materiality Free from error

InstructionsIdentify the appropriate qualitative characteristic(s) to be used given the information provided below.

(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.

(b) Quality of information that confirms users鈥� earlier expectations.

(c) Imperative for providing comparisons of a company from period to period.

(d) Ignores the economic consequences of a standard or rule.

(e) Requires a high degree of consensus among individuals on a given measurement.

(f) Predictive value is an ingredient of this fundamental quality of information.

(g) Four qualitative characteristics that are related to both relevance and faithful representation.

(h) An item is not recorded because its effect on income would not change a decision.

(i) Neutrality is an ingredient of this fundamental quality of accounting information.

(j) Two fundamental qualities that make accounting information useful for decision-making purposes.

(k) Issuance of interim reports is an example of what enhancing quality of relevance?

What is meant by term 鈥渜ualitative characteristics of accounting information鈥�?

(Elements of Financial Statements) Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below.

Assets Distributions to owners Expenses Liabilities Comprehensive Income Gains Equity Revenues Losses Investments by owners

Instructions

Identify the element or elements associated with the 12 items below.(a) Arises from peripheral or incidental transactions.

(b) Obligation to transfer resources arising from a past transaction.

(c) Increases ownership interest.

(d) Declares and pays cash dividends to owners.

(e) Increases in net assets in a period from nonowner sources.

(f) Items characterized by service potential or future economic benefit.

(g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

(h) Arises from income statement activities that constitute the entity鈥檚 ongoing major or central operations.

(i) Residual interest in the assets of the enterprise after deducting its liabilities.

(j) Increases assets during a period through sale of product.

(k) Decreases assets during the period by purchasing the company鈥檚 own stock.(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

Question: What two assumptions are central to the IASB conceptual framework?
See all solutions

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