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Chapter 2: Question 7Q (page 61)

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.

Short Answer

Expert verified

Users of financial information such as investors, creditors, and their representatives are expected to have a sound knowledge ofaccounting concepts, financial statements as well as business and economic activities. They are also expected to be prepared to study and translate information carefully.

Step by step solution

01

Meaning of financial statements 

Financial statements are the statements prepared by all types of organizations to ascertain the result of operating and non-operating activities of business and help in determining the financial position as on the date of closing the books of accounts for an accounting year.

02

Sophistication assumed by the Boards about the users of financial statements

The Board relies on general-purpose statements to provide information to users of the financial statements. The main purpose of such statements is to provide the most useful information to various user groups.

The primary purpose of this assumption is that users need a reasonable knowledge of business and financial matters in order to understand the information contained in the financial statements. This means that the level of reasonable knowledge that can be assumed affects the manner and extent to which the information is reported when preparing financial statements.

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Most popular questions from this chapter

Question: William Murray achieved one of his life-long dreams by opening his own business, The Caddie Shack Driving Range, on May 1, 2017. He invested \(20,000 of his own savings in the business. He paid \)6,000 cash to have a small building constructed to house the operations and spent \(800 on golf clubs, golf balls, and yardage signs. Murray leased 4 acres of land for \)1,000 per month. (He paid the first month鈥檚 rent in cash.) During the first month, advertising costs totaled \(750, of which \)150 was unpaid at the end of the month. Murray paid his three nephews \(400 for retrieving golf balls. He deposited in the company鈥檚 bank account all revenues from customers (\)4,700). On May 15, Murray withdrew \(800 in cash for personal use. On May 31, the company received a utility bill for \)100 but did not immediately pay it. On May 31, the balance in the company bank account was \(15,100.

Murray is feeling pretty good about results for the first month, but his estimate of profitability ranges from a loss of \)4,900 to a profit of \(1,650.

Accounting

Prepare a balance sheet at May 31, 2017. Murray appropriately records any depreciation expense on a quarterly basis. How could Murray have determined that the business operated at a profit of \)1,650? How could Murray conclude that the business operated at a loss of \(4,900?

Analysis

Assume Murray has asked you to become a partner in his business. Under the partnership agreement, after paying him \)10,000, you would share equally in all future profits. Which of the two income measures above would be more useful in deciding whether to become a partner? Explain.

Principles

What is income according to GAAP? What concepts do the differences in the three income measures for The Caddie Shack Driving Range illustrate?

Question: What are some of the differences in elements in the IASB and FASB conceptual frameworks?

Match the qualitative characteristics below with the following statements.1. Timeliness 5. Faithful representation2. Completeness 6. Relevance3. Free from error 7. Neutrality4. Understandability 8. Confirmatory value

  1. Quality of information that assures users that information represents the economic phenomena that it purports to represent.
  2. Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.
  3. The extent to which information is accurate in representing the economic substance of a transaction.
  4. Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.
  5. Quality of information that allows users to comprehend its meaning.

Question: Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) within the main body of the financial statements, (b) in the notes to the financial statements, or (c) as supplementary information.

Question: Companies that use IFRS:

(a) must report all their assets on the statement of financial position (balance sheet) at fair value.

(b) may report property, plant, and equipment and natural resources at fair value.

(c) may refer to a concept statement on estimating fair values when market data are not available.

(d) may only use historical cost as the measurement basis in financial reporting.
See all solutions

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