Conceptual Framework

1
Conceptual Framework

• Understandability
• Relevance
• Predictive value and feedback value
• Timeliness
• Reliability
• Representational faithfulness
• Verifiability

2
Conceptual Framework

• Reliability
• Neutrality
• Conservatism
• Comparability

3
Conceptual Framework

• Generally Accepted Accounting Principles
• Constraints
• Cost versus Benefit
• Materiality
• Matching Principle

4
Effects of Transactions

• Cash Basis vs. Accrual Basis Accounting
• The cash basis does not record transactions of
  the entity until cash is received.
• Therefore, cash flow from operations on the SCFP
  will equal net income on the income statement.
• Expenses will not be matched with revenues
  earned.

5
Effects of Transactions

• Cash Basis vs. Accrual Basis Accounting
• The accrual basis will record expenses and
  revenues as they meet the established criteria
  (discussed later).
• Therefore, revenues are recorded when earned and
  liabilities recorded when obligations arise.
• Expenses are matched with revenues of the period.

6
Effects of Transactions

• Revenue Recognition Criteria
• Revenues are earned when the transaction is
  substantially completed.
• The amount earned can be measured.
• Ownership of the product/benefits must change.
• Cash collection is reasonably certain.
• The cost of the items sold must be matched to the
  revenues earned.

7
Basic Accounting Equation

• Assets Liabilities Shareholders Equity

8
Basic Accounting Equation

• Every transaction must balance with this equation
• Shareholders Equity includes the value of shares
  issued plus the accumulated net earnings of the
  corporation less dividends
• Revenues in the period are increases in SE while
  expenses are decreases

9
Transaction Analysis

• All transactions must have at least two parts
  containing any of the following five attributes
• asset
• liability
• equity
• revenue
• expense

10
Transaction Analysis

• The following questions should be asked
• Does this transaction involve cash?
• Will there be any impact in future periods
  (either cash inflows or outflows)?
• Has there been any revenue recognized?
• If so, what expenses need to be matched to the
  revenues?
• Are future entries required (depreciation or
  interest)?

11
Effects of Transactions

• Bank Loans
• Bank loans are liabilities due to the obligation
  to pay cash in the future
• Valued at the amount of principal to be repaid
• Interest is not included as part of the
  obligation until the passage of time

12
Effects of Transactions

• Equipment Purchases
• Equipment is a non-current asset since it will
  contribute benefits for more than one year.
• Cost of this equipment is not treated as an
  expense in one period, but in many.
• Cost of the equipment is allocated to each period
  for the duration of its useful life (amortization
  or depreciation).

13
Effects of Transactions

• Purchase of new inventory
• Inventory is considered an asset until the units
  are sold to earn revenue.
• The cost of the inventory sold is then matched
  with the revenues earned on the income statement.

14
Effects of Transactions

• Salaries Earned
• Regardless of the amount of salaries paid in cash
  during the period, the cost of all salaries
  earned should be matched with the revenue
  generating activities of the period.
• Any amount of salaries unpaid represents an
  obligation (liability) of the company.

15
Effects of Transactions

• Dividends
• Represent payments to the shareholders of the
  corporation as part of their stake in the
  accumulated earnings of the corporation.
• They are not expenses on the income statement
  since they are tied to any revenues in the period.