Conceptual Framework: TRUE or FALSE | Accounting
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- 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 limited of financial accounting and financial statements.
- A Conceptual Framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the Conceptual Framework and a formal standard-setting body will not be necessary.
- Use of a sound of Conceptual Framework in the development of accounting principles will make financial statements of all entities COMPARABLE because alternative accounting methods for similar transactions will be eliminated.
- Accounting theory is developed without consideration of the environment within which it exists.
- Relevance and Reliability are the two primary qualities that make accounting information useful for decision making.
- To be relevant, accounting information must be capable of making a difference in a decision.
- Information that has been measured and reported in a similar manner for different enterprises is considered COMPARABLE.
- Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years before any change in principle is adopted.
- When an amount is determined by the accountant to be immaterial in relation to other amounts reported in the financial statements, that amount may be deleted from the financial statements.
- The basis for determining whether an item is material is based on both quantitative and qualitative factors.
- The fact that equity represents an ownership interest and a residual claim against the net assets of an enterprise means that in the event of liquidation, creditors have a priority over owners in the distribution of assets.
- The three elements - assets, liabilities, and equity - describe transactions, events, and circumstances that affect an enterprise during a period of time.
- The economic entity assumption is useful only when the entity referred to is a profit-seeking business enterprise.
- The going-concern assumption is generally applicable in most business situations unless liquidation appears imminent.
- The monetary unit assumption means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
- The periodicity assumption is a result of the demands of various financial statement user groups for timely reporting of financial information.
- If Company A wishes to acquire an asset owned by Company B, the cost principle would require Company A to record the asset at the ORIGINAL COST to Company B.
- Generally, confirmation of a sale to independent interests is used to indicate the point at which revenue is recognized.
- Recognition of revenue when cash is collected is appropriate only when it is impossible to establish the revenue figure at the time of the sale because of the uncertainty of collection.
- Under the expense recognition principle, it is possible to have an expense reported on the income statement in one period and the cash payment for that expense reported in another period.
- Period costs such as Officer Salaries and Administrative Expenses attach to the product and are carried into future periods if the revenue from the product is recognized in subsequent periods.
- The full disclosure principle states that information should be provided when it is of sufficient importance to influence that judgement and decisions of an informed user.
- The notes to financial statements generally summarize the items presented in the main body of the statements.
- The difficulty in applying the cost constraint is the costs and especially the benefits are not always evident or measurable.
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