Intermediate Financial
Accounting
Kayes Arman
ID: 192-11-
Chapter 1
Conceptual Framework for Financial Reporting
Conceptual Framework
A conceptual framework can be defined as a system of ideas and objectives that
lead to the creation of a consistent set of rules and standards.
Users of financial statements need relevant and reliable information, to provide
this information professional develop a set of principle and guidelines. These
principle and framework is known as Conceptual Framework.
Objectives of Conceptual Framework
• To develop a coherent set of standards and rules.
• To solve new and emerging practical problems.
• understanding of financial reporting and Compare the financial statements of different organizations
more efficiently.
• Useful to those making investment and credit decisions.
• Useful in making resource allocation decisions
Qualitative Characteristics of Accounting Information
The overriding criterion for evaluating accounting information is that it must be useful
for decision making. To be useful, it must be understandable.
There are two types of Qualitative Characteristics
1. Fundamental Qualities
2. Enhancing Qualities
Fundamental qualities of useful accounting information.
Relevance: Accounting information is relevant if it is capable of making a difference in a decision. Relevant
information has
1. Predictive value
2. Confirmatory value
3. Materiality
Faithful Representation: For accounting information to be useful, the numbers and descriptions
contained in the financial statements must faithfully represent what really existed or happened. To be a
faithful representation, information must be
4. Complete
5. Neutral
6. Free of material error
Enhancing qualities of useful information
1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
Elements of Financial Statements
1. Assets.
2. Liabilities.
3. Equity.
4. Investments by owners.
5. Distributions to owners.
6. Comprehensive income.
7. Revenues.
8. Expenses.
9. Gains.
10. Losses.
Basic Assumptions
1. Economic Entity Assumption: The economic entity assumption is an accounting principle that separates the
transactions carried out by a business entity and its owner.
2. Going Concern Assumption : An accounting guideline which allows the readers of financial statements to
assume that the company will continue on long enough to carry out its objectives and commitments.
3. Monetary Unit Assumption : The monetary unit concept is an accounting principle that assumes business
transactions or events can be measured and expressed in terms of monetary units and the monetary units
are stable and dependable
4. Periodicity Assumption: Periodicity assumption is the accounting concept that use to prepare and
present Financial Statements into the artificial period of times as required by internal management,
shareholders or investors.
Principles
Historical Cost Principle: the assets are recorded base on the price at the time they are purchased. And
the liabilities are recorded based on the values that expected to pay at the original value rather than market value
or inflation-adjusted value.
Fair Value Principle: The fair value is the amount that the asset could be sold, or a liability settled for a value that
is fair to both the buyer and the seller.
Revenue Recognition Principle: revenue should be recorded when it has been earned, not received.
Expense Recognition Principle: Expenses recognition primarily refers to the accounting principle that follows the
accrual basis concept where expenses are recognized and matched in the books in the same period as that of the
revenues.
Full Disclosure Principle: The full disclosure principle requires a company to provide the necessary information so
that people who are accustomed to reading financial information are able to make informed decisions regarding
the company.
