Recognition and Measurement in Financial Statements;
Elements of Financial Statements;
Using Cash Flow Information and Present Value ill Accounting Measurements
Conceptual Framework for Financial Reporting.
The objective of general-purpose financial reporting is
to provide. financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity"
The components of the conceptual framework for financial accounting and reporting include:
assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses.
The two fundamental qualitative characteristics of accounting information are
Relevance and faithful representation.
The enhancing qualitative characteristics of accounting information are
Comparability, verifiability, timeliness, and understandability.
SFAC 5 established four fundamental recognition criteria:
Definitions, measurability, relevance, and reliability.
Financial Capital means:
Earnings may not be recognized until the dollar investment in net assets, measured in units of money or purchasing power, is returned. OR Earnings may not be recognized until the current replacement costs of assets with the same productive capabilities of the assets used up are returned.
Comprehensive income is
Earnings adjusted for cumulative accounting adjustments and other nonowner changes in equity
(such as foreign currency translation adjustments)
According to SFAC 6, realization is the process of
converting noncash resources and rights into money through the sale of assets for cash or claims to cash
SFAC 7 applies only to
The current measure of an estimated future cash inflow or outflow, discounted at an interest rate for the number ofperiods between today and the date of the estimatedcash flow.
Tthe price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under market conditions."
According to SFAC 7, a present value measurement should capture these four elements:
1] An estimate of the future cash flow, or in more complex cases, series of future cash flows at different
2] Expectations about possible variations.in the amount or timing of those cash flows.
3] The time value of money, represented by the risk-free rate of interest.
4J The price for bearing the uncertainty inherent in the asset or liability.
5] Other, sometimes unidentifiable factors, including illiquidity and market imperfections.
The expected cash flow approach focuses on
direct analysis of the cash flows in question and on explicit assumptions about the range of possible estimated cash flows and their respective probabilities.
The discount rate adjustment approach assumes that:
a single interest rate convention can reflect all of the expectations about future cash flows and the appropgiate risk premium.
The purpose of all accounting allocations is
to report changes in the value, utility, or substance of assets and liabilities overtime
Income is a measure of
management's efficiency in combining the factors of production into desired goods and services.
When is revenue recognized?
Under the accrual basis of accounting, revenue is generally recognized at the point of sale (ASC Topic 605) or as service is performed.
Three exceptions exist to the general revenue recognition rule:
during production, at the point where production is complete, and at the point of cash collection.
Criteria for recognizing income during production (percentage of completion):
• Long-term construction,*property, or service contract
Dependable estimates of extent of progress and cost to complete
• Reasonable assurance of collectibility of contract price
Criteria for recognizing income at completion of production (NRV):
• Immediate marketability at quoted prices
• Unit interchangeability
• Difficulty of determining costs
Criteria for recognizing income at cash collection (installment ad cost recovery methods):
• Absence of a reasonablebasis forestimating degree of collectibility
When the future benefits of period costs cannot be measured, these are recognized…
When the benefits of period costs can be measured in future periods, these are…
Systematically and rationally allocated
Income is …
the net effect of inflows of revenue and outflows of expense during a period of time.
Under accrual-basis recognition, revenues and expenses are…
(I) Revenue-recognition of revenue earned, but not received
(2) Expense-recognition of expenseincurred, but not paid
The effects of the deferral method on revenue and expenses are
(1) Revenue-postponement of recognition of revenue; cash is received, but revenue is not earned
(2) Expense-postponement of recognition of expense; cash is paid, but expense is not incurred
(3) A deferral postpones recognition of revenue or expense by placing the amount in liability or asset accounts.
(4) Two methods are possible for deferring revenues and expenses depending on whether real or nominal accounts are originally used to record the cash transaction.
When converting cash basis records to accrual basis, two amounts must be identified:
(1) The currentbalance in the given account (cash basis) and
(2) The correct balance in the account (accrual basis).
(a) The journal entries must adjust the account balances from their current amounts to the correct amounts.