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ch02

CHAPTER2

ConceptsUnderlying

FinancialAccounting

ASSIGNMENTCLASSIFICATIONTABLE（BYTOPIC）

Topics

Questions

BriefExercises

Exercises

Concepts

forAnalysis

1.

Conceptualframework–general.

1,21

1,2

2.

Objectivesoffinancialreporting.

2,5

3

3.

Qualitativecharacteristicsofaccounting.

3,4,6,24

1,2

1,2

4

4.

Elementsoffinancialstatements.

7,8,9

3,9,10

3

5.

Basicassumptions.

10,11,12

4

4,5

6.

Basicprinciples:

a.Historicalcost.

b.Revenuerecognition.

c.Expensematching.

d.Fulldisclosure.

13,14,15

16,17,18

19

20,21,22

5

4,5

5

4,5

4,5,6

5,6

5,6,7,8,9,10,11

7.

Accountingprinciples–comprehensive.

7,8

8.

Constraints.

23,24,25,26

6,7

1

12

9.

Comprehensiveassign-

mentsonassumptions,principles,andconstraints.

8

4,5

ASSIGNMENTCLASSIFICATIONTABLE（BYLEARNINGOBJECTIVE）

LearningObjectives

BriefExercises

Exercises

1.Describetheusefulnessofaconceptualframework.

2.DescribetheFASB’seffortstoconstructaconceptualframework.

3.Understandtheobjectivesoffinancialreporting.

4.Identifythequalitativecharacteristicsofaccountinginformation.

1,2

1,2

5.Describethebasicelementsoffinancialstatements.

3,10

3

6.Describethebasicassumptionsofaccounting.

4,8,9

4,5

7.Explaintheapplicationofthebasicprinciplesofaccounting.

5,9

4,5,6,7,8

8.Describetheimpactthatconstraintshaveonreportingaccountinginformation.

6,7,9

1,4,5

ASSIGNMENTCHARACTERISTICSTABLE

Item

Description

LevelofDifficulty

Time

（minutes）

E2-1

Qualitativecharacteristics.

Moderate

25–30

E2-2

Qualitativecharacteristics.

Simple

15–20

E2-3

Elementsoffinancialstatements.

Simple

15–20

E2-4

Assumptions,principles,andconstraints.

Simple

15–20

E2-5

Assumptions,principles,andconstraints.

Moderate

20–25

E2-6

Fulldisclosureprinciple.

Complex

20–25

E2-7

Accountingprinciples–comprehensive.

Moderate

20–25

E2-8

Accountingprinciples–comprehensive.

Moderate

20–25

CA2-1

Conceptualframework–general.

Simple

20–25

CA2-2

Conceptualframework–general.

Simple

25–35

CA2-3

Objectivesoffinancialreporting.

Moderate

25–35

CA2-4

Qualitativecharacteristics.

Moderate

30–35

CA2-5

Revenuerecognitionandmatchingprinciple.

Complex

25–30

CA2-6

Revenuerecognitionandmatchingprinciple.

Moderate

30–35

CA2-7

Matchingprinciple.

Complex

20–25

CA2-8

Matchingprinciple.

Moderate

20–25

CA2-9

Matchingprinciple.

Moderate

20–30

CA2-10

Qualitativecharacteristics.

Moderate

20–30

CA2-11

Matching–ethics

Moderate

20–25

CA2-12

Cost/Benefit

Moderate

30–35

ANSWERSTOQUESTIONS

1.Aconceptualframeworkisacoherentsystemofinterrelatedobjectivesandfundamentalsthatcanleadtoconsistentstandardsandthatprescribesthenature,function,andlimitsoffinancialaccountingandfinancialstatements.Aconceptualframeworkisnecessaryinfinancialaccountingforthefollowingreasons:

1.ItwillenabletheFASBtoissuemoreusefulandconsistentstandardsinthefuture.

2.Newissueswillbemorequicklysolublebyreferencetoanexistingframeworkofbasictheory.

3.Itwillincreasefinancialstatementusers’understandingofandconfidenceinfinancialreporting.

4.Itwillenhancecomparabilityamongcompanies’financialstatements.

2.Theprimaryobjectivesoffinancialreportingareasfollows:

1.Provideinformationusefulininvestmentandcreditdecisionsforindividualswhohaveareasonableunderstandingofbusiness.

2.Provideinformationusefulinassessingfuturecashflows.

3.Provideinformationaboutenterpriseresources,claimstotheseresources,andchangesinthem.

3.“Qualitativecharacteristicsofaccountinginformation”arethosecharacteristicswhichcontributetothequalityorvalueoftheinformation.Theoverridingqualitativecharacteristicofaccountinginformationisusefulnessfordecisionmaking.

4.Relevanceandreliabilityarethetwoprimaryqualitiesofusefulaccountinginformation.Forinforma-tiontoberelevant,itshouldhavepredictivevalueorfeedbackvalue,anditmustbepresentedonatimelybasis.Relevantinformationhasabearingonadecisionandiscapableofmakingadifferenceinthedecision.Relevantinformationhelpsuserstomakepredictionsabouttheoutcomesofpast,present,andfutureevents,ortoconfirmorcorrectpriorexpectations.Reliableinformationcanbedependedupontorepresenttheconditionsandeventsthatitisintendedtorepresent.Reliabilitystemsfromrepresentationalfaithfulness,neutrality,andverifiability.

5.Inprovidinginformationtousersoffinancialstatements,theBoardreliesongeneral-purposefinancialstatements.Theintentofsuchstatementsistoprovidethemostusefulinformationpossibleatminimalcosttovarioususergroups.Underlyingtheseobjectivesisthenotionthatusersneedreasonableknowledgeofbusinessandfinancialaccountingmatterstounderstand

theinformationcontainedinfinancialstatements.Thispointisimportant:

itmeansthatinthepreparationoffinancialstatementsalevelofreasonablecompetencecanbeassumed;thishasanimpactonthewayandtheextenttowhichinformationisreported.

6.Comparabilityfacilitatescomparisonsbetweeninformationabouttwodifferententerprisesataparticularpointintime.Consistencyfacilitatescomparisonsbetweeninformationaboutthesameenterpriseattwodifferentpointsintime.

7.Atpresent,theaccountingliteraturecontainsmanytermsthathavepeculiarandspecificmeanings.Someofthesetermshavebeeninuseforalongperiodoftime,andtheirmeaningshavechangedovertime.Sincetheelementsoffinancialstatementsarethebuildingblockswithwhichthestatementsareconstructed,itisnecessarytodevelopabasicdefinitionalframeworkforthem.

8.Distributionstoownersdifferfromexpensesandlossesinthattheyrepresenttransferstoowners,andtheydonotarisefromactivitiesintendedtoproduceincome.Expensesdifferfromlossesinthattheyarisefromtheentity’songoingmajororcentraloperations.Lossesarisefromperipheralorincidentaltransactions.

QuestionsChapter2（Continued）

9.Investmentsbyownersdifferfromrevenuesandgainsinthattheyrepresenttransfersbyownerstotheentity,andtheydonotarisefromactivitiesintendedtoproduceincome.Revenuesdifferfromgainsinthattheyarisefromtheentity’songoingmajororcentraloperations.Gainsarisefromperipheralorincidentaltransactions.

10.Thefourbasicassumptionsthatunderliethefinancialaccountingstructureare:

1.Aneconomicentityassumption.

2.Agoingconcernassumption.

3.Amonetaryunitassumption.

4.Aperiodicityassumption.

11.（a）Inaccountingitisgenerallyagreedthatanymeasuresofthesuccessofanenterpriseforperiodslessthanitstotallifeareatbestprovisionalinnatureandsubjecttocorrection.Measurementofprogressandstatusforarbitrarytimeperiodsisapracticalnecessitytoservethosewhomustmakedecisions.Itisnottheresultofpostulatingspecifictimeperiodsasmeasurablesegmentsoftotallife.

（b）Thepracticeofperiodicmeasurementhasledtomanyofthemostdifficultaccountingproblemssuchasinventorypricing,depreciationoflong-termassets,andthenecessityforrevenuerecognitiontests.Theaccrualsystemcallsforassociatingrelatedrevenuesandexpenses.Thisbecomesverydifficultforanarbitrarytimeperiodwithincompletetransactionsinprocessatboththebeginningandtheendoftheperiod.Anumberofaccountingpracticessuchasadjustingentriesorthereportingofcorrectionsofpriorperiodsresultdirectlyfromeffortstomakeeachperiod’scalculationsasaccurateaspossibleandyetrecognizingthattheyareonlyprovisionalinnature.

12.Themonetaryunitassumptionassumesthattheunitofmeasure（thedollar）remainsreasonablystablesothatdollarsofdifferentyearscanbeaddedwithoutanyadjustment.Whenthevalueofthedollarfluctuatesgreatlyovertime,themonetaryunitassumptionlosesitsvalidity.

TheFASBinConceptNo.5indicatedthatitexpectsthedollarunadjustedforinflationordeflationtobeusedtomeasureitemsrecognizedinfinancialstatements.OnlyifcircumstanceschangedramaticallywilltheBoardconsideramorestablemeasurementunit.

13.Someoftheargumentswhichmightbeusedareoutlinedbelow:

1.Costisdefiniteandreliable;othervalueswouldhavetobedeterminedsomewhatarbitrarilyandtherewouldbeconsiderabledisagreementastotheamountstobeused.

2.Amountsdeterminedbyotherbaseswouldhavetoberevisedfrequently.

3.Comparisonwithothercompaniesisaidedifcostisemployed.

4.Thecostsofobtainingreplacementvaluescouldoutweighthebenefitsderived.

14.Revenueisgenerallyrecognizedwhen

（1）realizedorrealizable,and

（2）earned.

Theadoptionofthesalebasisistheaccountant’spracticalsolutiontotheextremelydifficultproblemofmeasuringrevenueunderconditionsofuncertaintyastothefuture.Therevenueisequaltotheamountofcashthatwillbereceivedduetotheoperationsofthecurrentaccountingperiod,butthisamountwillnotbedefinitelyknownuntilsuchcashiscollected.Theaccountant,underthesecircumstances,insistsonhaving“objectiveevidence,”thatis,evidenceexternaltothefirmitself,onwhichtobaseanestimateoftheamountofcashthatwillbereceived.Thesaleisconsideredtobetheearliestpointatwhichthisevidenceisavailableintheusualcase.Untilthesaleismade,anyestimateofthevalueof