Accounting 201 Chapter 2

Establishes the concepts that underlie financial reporting.

The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

If it has value as an input to predictive processes used by investors to form their own expectations about the future.

Relevant information also helps users confirm or correct prior prior expectations.

Is a company-specific aspect of relevance.  Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.

In short, it must make a difference or a company need to report it.

Companies must consider both quantitative and qualitative factors in determining whether an item is material.

Means that the numbers and descriptions match what really existed or happened.

means that all information that is necessary for faithful representation is provided.

Means that a company cannot selection information to favor one set of interested parties over another.

An information item that is free from error will be more a accurate (faithful) representation of a financial item.

Information that is measured and reported in a similar manner for different companies.  Enables users to identify the real similarities and differences in economic events between companies.

Another type of comparabiity is present when a company applies the same accounting treatment to similar events, from period to period.

Occurs when independent measurers, using the same methods, obtain similar results.

Means having the information available to decision-makers before it loses is capacity to influence decisions.

Is the quality of information that lets reasonably informed users see it's significance.

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Residual interest in the assets of an entity that remains after deducting it's liabilities.  In a business enterprise, the equity is the ownership interest.

Means that economic activity can be identified with a particular unit of accountability.

That the company will have a long life.

Means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

Implies that a company can divides its economic activities into artificial time periods.  The most common are monthly, quarterly, and yearly.

Requires that companies account for and report many assets and liabilities on the basis of acquisition price.

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement rate.

Requires that companies recognize revenue in the accounting period in which performance obligation is satisfied.

It follows then that recognition of expenses is related to net changes in assets and earning revenues.  In practice, the approach for recognizing expense is, "Let the expense follow the revenues".