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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

(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.

1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principle

Instructions

Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once

.(a) Allocates expenses to revenues in the proper period.

(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)

(c) Ensures that all relevant financial information is reported.

(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)

(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.

(g) Assumes that the dollar is the 鈥渕easuring stick鈥� used to report on financial performance.

Briefly describe the two fundamental qualities of useful accounting information.

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

What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below?

(a) Target was involved in litigation over the last year. This litigation is disclosed in the financial statements.

(b) Target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets.

(c) Target records the purchase of a new Dell PC at its cash equivalent price.

Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne鈥檚 supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice.Instructions

(a) Help Wayne recognize the purpose of and benefit of a conceptual framework.

(b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background.
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