Assignment I

CHAPTER ONE

CONCEPTUAL FRAMEWORK

Submission deadline May 24

1. Accounting information provides useful information about business transactions and events. Those
who provide and use financial reports must often select and evaluate accounting alternatives. The
Conceptual Framework examines the characteristics of accounting information that make it useful
for decision-making. It also points out that various limitations inherent in the measurement and
reporting process may necessitate trade-offs or sacrifices among the characteristics of useful
information.
Instructions
(a) Describe briefly the following characteristics of useful accounting information.
i. Relevance.
ii. Faithful representation.
iii. Understandability.
iv. Comparability (consistency).
v. Neutrality.
(b) For each of the following pairs of information characteristics, give an example of a situation in
which one of the characteristics may be sacrificed in return for a gain in the other.
i. Relevance and faithful representation.
ii. Relevance and consistency.
iii. Comparability and consistency.
iv. Relevance and understandability.
(c) What criterion should be used to evaluate trade-offs between information characteristics?

2. Indicate whether the following statements about the Conceptual Framework are true or false. If false,
provide a brief explanation supporting your position.
a) Accounting rule-making that relies on a body of concepts will result in useful and consistent
pronouncements.
b) General-purpose financial reports are most useful to company insiders in making strategic
business decisions.
c) Accounting standards based on individual conceptual frameworks generally will result in
consistent and comparable accounting reports.
d) Capital providers are the only users who benefit from general-purpose financial reporting.

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 e) Accounting reports should be developed so that users without knowledge of economics and
business can become informed about the financial results of a company.
f) The objective of financial reporting is the foundation from which the other aspects of the
framework logically result.
3. (Usefulness, Objective of Financial Reporting, Qualitative Characteristics) Indicate whether the
following statements about the Conceptual Framework are true or false. If false, provide a brief
explanation supporting your position.
a) The fundamental qualitative characteristics that make accounting information useful are
relevance and verifiability.
b) Relevant information has predictive value, confirmatory value, or both.
c) Conservatism, a prudent reaction to uncertainty, is considered a constraint of financial reporting.
d) Information that is a faithful representation is characterized as having predictive or confirmatory
value.
e) Comparability pertains only to the reporting of information in a similar manner for different
companies.
f) Verifiability is solely an enhancing characteristic for faithful representation.
g) In preparing financial reports, it is assumed that users of the reports have reasonable knowledge
of business and economic activities.
4. (Qualitative Characteristics) The Conceptual Framework identifies the qualitative characteristics
that make accounting information useful. Presented below are a number of questions related to these
qualitative characteristics and underlying constraint.
a) What is the quality of information that enables users to confirm or correct prior expectations?
b) Identify the overall or pervasive constraint developed in the Conceptual Framework.
c) A noted accountant once remarked, “If it becomes accepted or expected that accounting
principles are determined or modified in order to secure purposes other than economic
measurement, we assume a grave risk that confidence in the credibility of our financial
information system will be undermined.” Which qualitative characteristic of accounting
information should ensure that such a situation will not occur? (Do not use faithful
representation.)
d) Muruyama Group switches from FIFO to average-cost and then back to FIFO over a 2-year
period. Which qualitative characteristic of accounting information is not followed?
e) Assume that the profession permits the savings and loan industry to defer losses on investments
it sells, because immediate recognition of the loss may have adverse economic consequences on
the industry. Which qualitative characteristic of accounting information is not followed? (Do not
use relevance or faithful representation.)

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 f) What are the two fundamental qualities that make accounting information useful for decision-
making?
g) Watteau Inc. does not issue its first-quarter report until after the second quarter's results are
reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)
h) Predictive value is an ingredient of which of the two fundamental qualities that make accounting
information useful for decision-making purposes?
i) Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line
basis. Which qualitative characteristic of accounting information may not be present?
j) Nadal Company has attempted to determine the replacement cost of its inventory. Three different
appraisers arrive at substantially different amounts for this value. The president, nevertheless,
decides to report the middle value for external reporting purposes. Which qualitative
characteristic of information is lacking in these data? (Do not use reliability or representational
faithfulness.)
5. (Qualitative Characteristics) The qualitative characteristics that make accounting information
useful for decision-making purposes are as follows.

Instructions
Identify the appropriate qualitative characteristic(s) to be used given the information provided below.
a) Qualitative characteristic being displayed when companies in the same industry are using the
same accounting principles.
b) Quality of information that confirms users' earlier expectations.
c) Imperative for providing comparisons of a company from period to period.
d) Ignores the economic consequences of a standard or rule.
e) Requires a high degree of consensus among individuals on a given measurement.
f) Predictive value is an ingredient of this fundamental quality of information.
g) Four qualitative characteristics that enhance both relevance and faithful representation.
h) An item is not reported because its effect on income would not change a decision.
i) Neutrality is a key ingredient of this fundamental quality of accounting information.
j) Two fundamental qualities that make accounting information useful for decision-making
purposes.
k) Issuance of interim reports is an example of what enhancing ingredient?
6. (Elements of Financial Statements) Five interrelated elements that are most directly related to
measuring the performance and financial status of an enterprise are provided below.

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Instructions
Identify the element or elements associated with the following nine items.
a) Obligation to transfer resources arising from a past transaction.
b) Increases ownership interest by issuance of shares.
c) Declares and pays cash dividends to owners.
d) Increases in net assets in a period from non-owner sources.
e) Items characterized by service potential or future economic benefit.
f) Equals increase in assets less liabilities during the year, after adding distributions to owners and
subtracting investments by owners.
g) Residual interest in the assets of the enterprise after deducting its liabilities.
h) Increases assets during a period through sale of product.
i) Decreases assets during the period by purchasing the company's own shares.
7. (Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and
constraint used in this chapter.
1. Economic entity assumption
2. Going concern assumption
3. Monetary unit assumption
4. Periodicity assumption
5. Accrual-basis assumption
6. Historical cost principle
7. Fair value principle
8. Expense recognition principle
9. Full disclosure principle
10. Revenue recognition principle
11. Cost constraint
Instructions
Identify by number the accounting assumption, principle, or constraint that describes each situation
below. Do not use a number more than once.
a) Allocates expenses to revenues in the proper period.
b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do
not use revenue recognition principle.)
c) Ensures that all relevant financial information is reported.
d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost
principle.)
e) Generally records revenue at the point of sale.
f) Indicates that personal and business record keeping should be separately maintained.

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 g) Separates financial information into time periods for reporting purposes
h) Permits the use of fair value valuation in certain situations.

8. (Assumptions, Principles, and Constraint) Presented below are a number of operational

guidelines and practices that have developed over time.
Instructions
Select the assumption, principle, or constraint that most appropriately justifies these procedures and
practices. (Do not use qualitative characteristics.)
a) Fair value changes are not recognized in the accounting records.
b) Accounts receivable are recorded for sales on account rather than waiting until cash is received.
c) Financial information is presented so that investors will not be misled.
d) Intangible assets are capitalized and amortized over periods benefited.
e) Brokerage companies use fair value for purposes of valuing financial securities.
f) Each enterprise is kept as a unit distinct from its owner or owners.
g) All significant post-statement of financial position events are reported.
h) Revenue is recorded at point of sale.
i) All important aspects of bond indentures are presented in financial statements.
j) Rationale for accrual accounting.
k) The use of consolidated statements is justified.
l) Reporting must be done at defined time intervals.
m) An allowance for doubtful accounts is established.
n) All payments out of petty cash are charged to Miscellaneous Expense.
o) Goodwill is recorded only at time of purchase.
p) Cash received and paid is not the basis used to recognize revenues and expenses.
q) A company charges its sales commission costs to expense.

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