conceptual framework

• in a case of a conflict between the conceptual framework and standards, what prevails?
• is conceptual framework mainly concerned with the preparation of general purpose financial statements
• The Conceptual Framework is a summary of the terms and concepts that underlie the preparation and presentation of financial statements.
• The underlying theme of the framework is the usefulness of the financial information in making economic decisions.
• If FRSC specifies a requirement in a standard that depart from aspects of the Conceptual Framework, it will explain the departure in the Basis for Conclusions on that Standard
• Financial Reporting is the provision of financial information about an entity to external users that is useful to them in making economic decisions and for assessing the effectiveness of the entity’s management.
• . The principal way of providing financial information to external users is through the annual financial statements.
• Liquidity is the availability of cash in the near future to cover currently maturing obligations.
• Economic sources and claims  Identify strengths and weaknesses  Asses liquidity, solvency and flexibility  Assess management stewardship
• Solvency is the availability of cash over a long term to meet financial commitments when they fall due.
• Flexibility is the capacity of the entity to adapt to changes.
• Relevance Means "the capacity of information to make a difference in a decision made by users." The major ingredients of relevance are predictive value and confirmatory value.
• Ingredients of Relevance Financial information has predictive value if it can be used as an input to processes employed by users to predict or forecast future outcomes.
• Financial information has confirmatory value if it provides feedback (confirms or changes) about previous evaluations.
• The predictive value and confirmatory value of financial information are interrelated. Information that has predictive value often also has confirmatory value.
• Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial reports make on the basis of those reports, which provide financial information about a specific reporting entity.
• Materiality is NOT an ingredient of relevance but rather an entity-specific aspect of relevance as there is no uniform quantitative threshold for materiality or predetermination of what could be material in a particular situation (nature or magnitude). Meaning, all materials items are relevant but not all relevant items are material.
• Qualitative characteristics are the qualities or attributes that make financial accounting information useful to the users. Under the Conceptual Framework for Financial Reporting, qualitative characteristics are classified into Fundamental qualitative characteristics and enhancing qualitative characteristics.'\
• The fundamental qualitative characteristics relate to the content or substance of financial information that make the information useful in making economic decisions. The fundamental qualitative characteristics are relevance and faithful representation.
• The accounting cycle represents the steps or procedures used in recording transactions and preparing financial statements.
• The accounting cycle implements the accounting process.
• Steps in accounting cycle include analyzing the business documents or transactions, journalizing, posting, preparing the unadjusted trial balance, preparing the adjusting entries, preparing the financial statements, preparing the closing entries, preparing a post-closing trial balance, and preparing the reversing entries.
• The unadjusted and post-closing trial balance, reversing entries and worksheet are optional steps in the accounting cycle.
• Accounting records are either business or source documents or books of original entry or books of final entry.
• Business or source documents pertain to the original source materials evidencing a transaction and examples include sales invoices, purchase invoices, official receipts, debit and credit memorandum, check stubs and minutes book.
• These accounting records are used for step 1: Analyzing the business documents or transactions.
• Books of original entry pertain to the journals and examples include general journal, sales journal, purchases journal, cash receipts journal and cash disbursements journal.
• Closing entries are made at the end of an accounting period after adjusting entries and financial statements have been prepared for the purpose of closing all nominal or temporary accounts.
• The adjustments normally requiring reversal at the beginning of the new period are: accrued expenses, accrued income, prepaid expenses under expense method, and deferred income under income method.
• The expense method is the unused portion is recognized as asset while the expired portion remains as expense.
• A worksheet is a multicolumn sheet of paper that an accountant uses in compiling and summarizing the information necessary for the preparation of the financial statements.
• The asset method is the original payment is debited to an asset account, such as prepaid insurance.
• Reversing entries are made at the beginning of the new accounting period in order to transfer all accrued and prepaid items established by adjusting entries to the nominal accounts that are to be used in recording transactions during the new period.
• The liability method is a liability account is credited for the receipt of the income, such as unearned rental income.
• The income method is an income account is credited for the receipt of the income, such as rental income.
• These accounting records are used for step 2: Journalizing.
• An accrued revenue can best be described as an amount collected and currently matched with expenses.
• An adjusting entry to adjust the unearned income account for the earned portion of advance collections during the year may be reversed in the next financial reporting period.
• Adjusting entries involve accruals or deferrals, and each adjusting entry affects one revenue account and one expense account.
• Journalizing is the process of recording transactions in the journal through journal entries.