Download GAAP #2

GAAP PowerPoint #2
Cost/Benefit (discussed in PPT #3)
Understandability
Decision Usefulness
Relevance
Reliability
Verifiability
Timeliness
Feedback
Value
Predictive
Value
Neutrality
Representational
Faithfulness
Comparability and Consistency
Materiality (discussed in PPT #3)
www.fasb.org
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To provide useful, understandable
information to users of financial
statements for decision making
For present and potential investors and
creditors and other users in making
rational investment, credit, and similar
decisions
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To help present and potential investors and
creditors and other users to assess the
amounts, timing, and uncertainty of prospective
cash receipts
To inform users about the
◦ economic resources of an enterprise;
◦ the claims to those resources (obligations);
◦ the effects of transactions, events, and
◦ circumstances that cause changes in resources
and claims to those resources
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Decision usefulness
◦ the quality of being useful to decision
making
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Understandability
◦ users must understand the information
within the context of the decision being
made
Relevance
Reliability
◦Definition: relating to the
matter at hand
◦Capable of making a
difference in the decision
making of the user
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Must have predictive or feedback
value
◦ Predicts or forecasts for users about the outcome
of events of a company
◦ Provides feedback value for users to confirm or
correct prior expectations of a company
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Must be presented in a timely manner
◦ Provides current information to users to help with
decision making
◦ Definition: the quality or state of
being reliable; and the extent to
which an experiment, test, or
measuring procedure yields the same
results on repeated trials http://www.merriamwebster.com
◦ Information must be verifiable, a
faithful representation, & reasonably
free of error & bias (neutral)
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Must be verifiable
◦ Able to be proven; not subject to opinion
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Must be a faithful representation
◦ Agreement between the accounting numbers and
supporting documentation
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Must be reasonably free from error
◦ No mistakes or inaccuracies should be found in the
financial statements
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Must be reasonably free from bias; should
be neutral
◦ Accounting information should not favor any
groups or companies but be a true and factual
representation of a company’s financial position.
Comparability
Consistency
Definition: The quality of information that enables
users to identify similarities in and differences
between two sets of economic phenomena.
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The purpose of comparison is to detect and
explain similarities and differences.
Accounting information should be
comparable across different companies and
over different time periods.
 www.fasb.org
◦ Definition: Conformity from period to period
with unchanging policies and procedures.
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Information about a particular enterprise
gains greatly in usefulness if it can be
compared with similar information.
Consistent use of accounting principles
from one accounting period to another
enhances the utility of financial
statements to users.
A quality of the relationship between two
accounting numbers
 www.fasb.org
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Explain the concept of the FASB’s conceptual
framework. (Slide 2)
What is the primary objective of financial
accounting?
Explain relevance and reliability of financial
statements.
What are the components of relevant
information?
What are the components of reliable information?
Why should financial statements be both
comparable and consistent?