Chapter 1 Concept Illustration 1.11

Accounting terms

objective

to provide info about the reporting entity to investors, lenders, and other creditors

fundamental qualities

relevance and faithful reppresentation

relevance

predictive value, confirmatory value, and materiality

faithful representation

completeness, neutrality, free from error

enhancing qualities

comparability, verifibility, timeliness, understandability

elements

assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, rev, exp, gains, losses

assumption

rule a business uses to dictate operating procedures

principles

rule or guideline that ensures financial information is presented clearly, consistently, and accurately

economic entity assumption

company keeps its activity separate and distinct from its owners

going concern assumption

the company will have a long life

monetary unit assumption

money is the common denominator of economic activity

periodicity assumption

economic activities can be broken up into artificial time periods

measurement principle

historical cost or fair value

historical cost principle

report assets and liabilities on the basis of acquisition price

fair value principle

report assets and liabilities based on the current market price

revenue recognition principle

companies recognize revenue in the accounting period in which the performance obligation is satisfied

expense recognition principle

companies recognize expenses when the work or the product contributes to revenue

product costs

material, labor, overheadp

period costs

salaries, admin

full disclosure principle

the nature and amount of information included in financial reports reflects a series of judgmental trade-offs (sufficient detail and condensation of material)c

cost constraint

cost-benefit relationship (weighing the odds)

3rd level: recognition, measurement, and disclosure concepts

assumptions, principles, and constraint

qualitative characteristics

fundamental qualities and enhanving qualities

2nd level: reporting entity, recognition and derecognition, measurement, presentation, and notes to financial statements

qualitiative characterists and elements