Accounting Chapter 2 Solutions

ANSWERS TO QUESTIONS

1. A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. A conceptual framework is necessary in financial accounting for the following reasons:

1. It will enable the FASB to issue more useful and consistent standards in the future.

2. New issues will be more quickly soluble by reference to an existing framework of basic theory.

3. It will increase financial statement users’ understanding of and confidence in financial reporting.

4. It will enhance comparability among companies’ financial statements.

2. The primary objectives of financial reporting are as follows:

1. Provide information useful in investment and credit decisions for individuals who have a reasonable understanding of business.

2. Provide information useful in assessing future cash flows.

3. Provide information about enterprise resources, claims to these resources, and changes in them.

3. “Qualitative characteristics of accounting information” are those characteristics which contribute to the quality or value of the information. The overriding qualitative characteristic of accounting information is usefulness for decision making.

4. Relevance and reliability are the two primary qualities of useful accounting information. For informa-tion to be relevant, it should have predictive value or feedback value, and it must be presented on a timely basis. Relevant information has a bearing on a decision and is capable of making a difference in the decision. Relevant information helps users to make predictions about the outcomes of past, present, and future events, or to confirm or correct prior expectations. Reliable information can be depended upon to represent the conditions and events that it is intended to represent. Reliability stems from representational...