Chapter 2: Investing and Financing Decisions and the Balance Sheet

May 29th, 2015
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A. Financial Accounting Conceptual Framework Underlying assumptions of accounting help the decision maker to understand what accounting information reports as well as the inherent limitations. 1. Qualities that make accounting information useful: • Relevancy – Timeliness Predictive Value Able to be used to help predict some future event

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Chapter 2: Investing and Financing Decisions and the Balance SheetA. Financial Accounting Conceptual FrameworkUnderlying assumptions of accounting help the decision maker to understand what accounting information reports as well as the inherent limitations.1. Qualities that make accounting information useful: Relevancy TimelinessPredictive ValueAble to be used to help predict some future eventFeedback ValueAllows me to evaluate my decisions after they have been made Reliability Accurate Representational faithfulnessTruthfulVerifiabilityVerifiable, when 2 or more independent look at the same method and come out with the same outcomeNeutralityUnbiased Comparability Comparable across firms and across time within the firm (usually 2 or more years of information presented) (within same industry such as Google and Yahoo) Consistency 2. Basic Assumptions Relate to the Balance Sheet Separate Entity (Economic Entity) Business is distinct and separate from its owners Unit of Measure (Monetary Measure) - The financial statement are represented in the monetary unit of the country in which it is operating Time Period (Accounting Period) - Indefinite life, allows a business to break that indefinite life down into measurable periods Continuity (Going Concern) - 3. Principles: Historical Cost Principle (Measurement Principle) Assets are reported on the financial statement at

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