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Chapter 2: Q.2-11FRS (page 76)
Question: What two assumptions are central to the IASB conceptual framework?
Answer
Accrual basis and going concern are the two assumptions.
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BE2-1 (L03) Match the qualitative characteristics below with the following statements. 1. Relevance 5. Comparability 2. Faithful representation 6. Completeness 3. Predictive value 7. Neutrality 4. Confirmatory value 8. Timeliness (a) Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena. (b) Having information available to users before it loses its capacity to influence decisions. (c) Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future. (d) Information that is capable of making a difference in the decisions of users in their capacity as capital providers. (e) Absence of bias intended to attain a predetermined result or to induce a particular behavior.
Question: The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting.
Management should not be required to report information that would significantly harm the company鈥檚 competitive position.
Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast themselves the company鈥檚 financial future.
Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business.
Companies should present certain elements of business reporting only if users and management agree they should be reported- a concept of flexible reporting.
Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.
Instructions
For each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting.
(Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mentionof these facts was made in the financial statements and the related notes.
Instructions
Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.
(a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted.
(b) Equipment purchases of \(170,000 were partly financed during the year through the issuance of a \)110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at \(60,000.
(c) Weller has reported its ending inventory at \)2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.
(d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.
Question: Describe the major constraint inherent in the presentation of accounting information.
Identify which basic principle of accounting is best described in each item below.(a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.(b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.(d) Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.
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