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Chapter 2: Question 1Q (page 61)

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?

Short Answer

Expert verified

A conceptual framework is a framework consisting of ideas and objectives that result in the creation of a consistent set of rules and standards.

A conceptual framework is essential in accounting because it specifies the nature, function, and limits of financial accounting and financial statements.

Step by step solution

01

Definition of Conceptual Framework

The conceptual framework can be defined as an instrument that is used to assemble, examine and translate information in an orderly and logical manner.

Its purpose is to make conceptual distinctions and collect different ideas. Strong conceptual framework results in the actual realization of the planned objective. It assists in knowing the future cash flows. It is also beneficial to those who make decisions related to credit and investment.

02

Necessity of conceptual framework in financial accounting

The importance of a conceptual framework in financial accounting is to check whether the financial statements are free from any bias or not and also assist the users by providing useful information required in their decision making.

It is a framework for establishing accounting standards, a source for resolving accounting disputes if any. The conceptual framework is useful for investors as it provides them with the risk capital, and the advisor is concerned about the risk that is included with their investment.

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Most popular questions from this chapter

Why is it necessary to develop a definitional framework for the basic elements of accounting?

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

E2-4 (L03) (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows.

Relevance Neutrality Verifiability

Faithful representation Completeness Understandability

Predictive value Timeliness Comparability

Confirmatory value Materiality Free from error

InstructionsIdentify the appropriate qualitative characteristic(s) to be used given the information provided below.

(a) Qualitative characteristic being employed 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 are related to both relevance and faithful representation.

(h) An item is not recorded because its effect on income would not change a decision.

(i) Neutrality is an 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 quality of relevance?

What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below?

(a) Target was involved in litigation over the last year. This litigation is disclosed in the financial statements.

(b) Target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets.

(c) Target records the purchase of a new Dell PC at its cash equivalent price.

What is meant by term “qualitative characteristics of accounting information”?
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