COM 202 - Week 2

Week 2: Chapter 2: A further look at financial statements pp.2-21 - 2-27 2.3 Framework for the preparation and presentation of financial statements - (almost) all companies prepare their financial statements using the accrual basis of accounting - A company will record the effects of transactions in the period when they occur and not when the company receives or pays cash - International accounting standards board (IASB) - the standard setting body responsible for developing IFRS Objective of general purpose financial reporting - The objective of financial reporting is to provide financial information to existing and potential investors, lenders and other users for decision making - These decisions depend on the company's profitability, cash flows and financial position - External users receive much of their financial information about a company by reading its financial statements - A company prepares a general purpose financial statement to meet the needs of all users - Qualitative Characteristics of useful financial information - Financial information prepared by a company needs qualitative characteristics that make the information useful Fundamental Qualitative Characteristics - Two fundamentals for qualitative characteristics of useful financial info are 1) Relevance and 2) faithful representation - Relevance = A fundamental qualitative characteristic describing information that makes a difference in a user's decision. It should have predictive value, confirmatory value, or both, and be material. Relevance - Information has relevance if knowledge of it will influence a user decision o It may have a predictive value or a confirmatory value or both - Materiality is an important component of relevance - Materiality is determined in terms of magnitude (dollar value) and/or nature (what the information relates to)
- Information might not be disclosed if its not needed (not relevant) or because the amounts of too small to make a difference (they are not material) - A bribe even if its not a large amount it is considered a material event due to its ethical and legal nature - Faithful representation = a fundamental qualitative characteristic describing information that represents economic reality. It must be complete, neutral and free from material error - For faithful representation information must have three characteristics: o Complete (nothing important was omitted) o Neutral (not biased toward one position or another) We achieve neutrality by exercising prudence o Free from material error (it provides an accurate description and no errors were made in the process used to determine it Enhancing Qualitative Characteristics - The conceptual framework describes four qualities that enhance the usefulness of info - 1) comparability = An enhancing qualitative characteristic of useful information that enables users to identify and understand similarities in, and differences among, items. - 2) verifiability = An enhancing qualitative characteristic of useful information that means that different knowledgeable and independent users could reach a consensus that the information is faithfully represented. - 3) An enhancing qualitative characteristic of useful information that means that information is available to decision-makers in time to be capable of influencing their decisions. - 4) An enhancing qualitative characteristic of useful information that means that information is clearly and concisely classified, characterized, and presented. - Only enchance the usefulness of financial information that is already useful
Cost Constraint - Cost constraint = the pervasive constraint that ensures that the value of the info provided in financial reporting is greater than the cost of providing it o Arises when the cost of preparing financial information outweighs the value of the information to users Going Concern Assumption - Going concern assumption = The assumption that the business will remain in operation for the foreseeable future. - We assume the company is a going concern o We report assets (land etc..) as non current because those will be assets used for many years Elements of Financial Statements - Classes grouped according to their economic characteristics - Assets, Liabilities, Equity, Revenue, Income ( gains) and Expenses (losses) Measurement of the Elements - Recognition (of financial statements)
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