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Chapter 2: Question 1E (page 65)

(Usefulness, Objective of Financial Reporting) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.

  1. Accounting rule-making that relies on a body of concepts will result in useful and consistent pronouncements.
  2. General-purpose financial reports are most useful to company insiders in making strategic business decisions.
  3. Accounting standards based on individual conceptual frameworks generally will result in consistent and comparable accounting reports.
  4. Capital providers are the only users who benefit from general-purpose financial reporting.
  5. Accounting reports should be developed so that the users without knowledge of economics and business can become informed about the financial results of a company.
  6. The objective of financial reporting is the foundation from which the other aspects of the framework logically result.

Short Answer

Expert verified

Indication for all the given options are as follows:

  • True
  • False
  • False
  • False
  • False
  • true

Step by step solution

01

Meaning of Financial Reporting

The termfinancial reporting refers to the process whereby the information gathered by the accountant whilerecording and bookkeeping are presented to the final users who can be either internal users like managers orexternal users like the government.

02

Explanation for Statement ‘a’

The primary reasons for developing an agreed conceptual framework are that it provides a basis for establishing accounting standards, a basis for resolving accounting disputes, fundamental principles which need to be repeated in accounting standards.

Thus, the statement is true.

03

Explanation for Statement ‘b’

General-purpose financial reports reflect all of the financial reporting information that is required by a business.

General-purpose financial reports are beneficial not only to the company insiders but also to a wide variety of users, consisting of shareholders, creditors, suppliers, employees, and regulators.

Thus, the statement is false.

04

Explanation for Statement ‘c’

Accounting standards are generally accepted accounting principles that provide the basis for accounting policies and for the preparation of financial statements.

Accounting standards are based on the individual conceptual frameworks will result in different conclusions about similar problems. Therefore, the standards will not be consistent with one another, and decisions related to the past may not be indicative of future ones.

Thus, the statement is false.

05

Explanation for Statement ‘d’

Capital providers are individuals who provide capital or extend credit to a provider or an affiliate of the provider to provide certain tax benefits from the systems to such individuals in interest.

Information that is beneficial for the capital providers might also be beneficial to the users of financial reporting other than the capital providers.

Thus, the statement is false.

06

Explanation for Statement ‘e’

Accounting reports are the collection of accounting information that is obtained from the accounting records of a business.

It is assumed that the users of the accounting reports possess adequate knowledge of the business and the economic activities.

Thus, the statement is false.

07

Explanation for Statement ‘f’

Financial reporting is inclusive of all the financial statements such as income statement, balance sheet, statement of cash flows, and statement of stockholder鈥檚 equity.

The purpose of financial reporting is to examine the usage of cash flow, the performance of the business, and its financial health.

Thus, the statement is true.

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Most popular questions from this chapter

Describe the basic assumptions of accounting.

Statement of Financial Accounting Concepts No.5 identifies four characteristics that an item must have before it is recognized in the financial statements. What are these four characteristics?

Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation鈥擝uildings 60,000

b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.

Inventory 21,000

Gain on Inventories 21,000

c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

Equipment 135,000

Common Stock 135,000

d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

Accounts Receivable 61,500

Sales Revenue 61,500

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?

According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.
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