Accounting Principles 8th Canadian Edition (Volume 2) Jerry Weygandt, Donald Kieso
Paul Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak (Test Bank All Chapters,
100% Original Verified, A+ Grade) (Chapter 11-18) Answers At The End Of Each Chapte
CHAPTER 11
FINANCIAL REPORTING CONCEPTS
CHAPTER STUDY OBJECTIVES
1. Explain the importance of having a conceptual framework of accounting, and list the key
components. The conceptual framework ensures that there is a consistent and coherent set of
accounting standards. Key components of the conceptual framework are the: (1) objective of financial
reporting; (2) elements of the financial statements; (3) qualitative characteristics; (4) recognition and
measurement concepts; and (5) foundational concepts, assumptions, and constraints.
2. Explain the objective of financial reporting, and define the elements of the financial statements.
The objective of financial reporting is to provide useful information for investors and creditors in
making decisions in their capacity as capital providers. The elements are assets, liabilities, equity,
revenue, and expense. Each element has a specific definition. The definitions provide important
guidance on when an element should be recognized.
3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to
financial reporting situations. The fundamental qualitative characteristics are relevance and faithful
representation. Financial information has relevance if it makes a difference in a decision. Materiality is
an important component of relevance. An item is material when it is likely to influence the decision of
a reasonably careful investor or creditor. Information is faithfully represented when it shows the
economic reality and is complete, neutral, and free from material error.
The enhancing qualitative characteristics are comparability, verifiability, timeliness, and
understandability. Comparability enables users to identify the similarities and differences between
companies. The consistent use of accounting policies from year to year is part of the comparability
characteristic. Information is verifiable if two knowledgeable and independent people would
generally agree that it faithfully represents the economic reality. Timeliness means that financial
information is provided when it is still highly useful for decision-making. Understandability enables
reasonably informed users to interpret and comprehend the meaning of the information provided in
the financial statements.
4. Apply the recognition and measurement criteria of the conceptual framework to financial
reporting situations. General recognition criteria require that elements be recognized in the financial
statements when it is probable that any economic benefit associated with the item will flow to or from
the business and the item has a cost or value that can be measured or estimated with a reasonable
amount of reliability. There are two approaches to revenue recognition: (1) contract-based and (2)
earnings. The contract-based approach requires that revenue be recognized when promised goods or
services are transferred and the amount reflects the consideration the business expects to receive.
The earnings approach requires that revenue be recognized when the earnings process is complete,
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
11-1
,Test Bank for Accounting Principles, Eighth Canadian Edition
the risks and rewards of ownership have been transferred, and the amount can be reliably measured.
Expenses are recognized when there is a decrease in an asset or increase in a liability, excluding
transactions with owners, which result in a decrease in owners’ equity. Four measurements used in
accounting are (1) historical cost, (2) current cost, (3) realizable value, and (4) present value. Incorrect
application of the basic recognition and measurement concepts can lead to material misstatements in
the financial statements. Incorrect application can be due to error or intentional misstatement.
5. Apply the foundational concepts, assumptions, and constraints of the conceptual framework to
financial reporting situations. The foundational concepts, assumptions, and constraints form the
bedrock of accounting and are used to achieve the objective of financial reporting. The reporting
entity concept requires that accounting for a reporting entity’s activities be kept separate and distinct
from the accounting for the activities of its owner and all other reporting entities. The going concern
assumption assumes that the company will continue operating for the foreseeable future. The
monetary unit concept means that money is the common denominator of economic activity. The
periodicity concept guides businesses in dividing up their economic activities into distinct time
periods. The cost constraint is a pervasive constraint that ensures the value of the information
provided is greater than the cost of providing it. The full disclosure concept requires companies to
fully disclose circumstances and events that make a difference to financial statement users.
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
11-2
,Test Bank for Accounting Principles, Eighth Canadian Edition
EXERCISES
Exercise 1
The conceptual framework for accounting discusses the following:
Code:
A Objective of Financial Reporting
B Qualitative Characteristics of Accounting Information
C Elements of Financial Statements
Instructions
For each item below, indicate the area of the conceptual framework that pertains to that item by
selecting the appropriate code.
Example:
C Asset (An asset is an element of financial statements.)
____ 1. Information that is helpful in assessing management’s performance
____ 2. Owners' equity
____ 3. Timeliness
____ 4. Neutral
____ 5. Expense
____ 6. Confirmatory value
____ 7 Faithful representation
____ 8 Comparability-consistency
____ 9. Information that is useful in making resource allocation decisions
____ 10 Full disclosure principle
Solution 1 (5 min.)
1. A
2. C
3. B
4. B
5. C
6. B
7. B
8. B
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11-3
, Test Bank for Accounting Principles, Eighth Canadian Edition
9. A
10. B
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Explain the importance of having a conceptual framework of accounting, and list
the key components.
Section Reference: The Conceptual Framework of Accounting
Learning Objective: Explain the objective of financial reporting, and define the elements of the
financial statements.
Section Reference: The Objective of Financial Reporting
Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the
conceptual framework to financial reporting situations.
Section Reference: Qualitative Characteristics of Useful Financial Information
Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual
framework to financial reporting situations.
Section Reference: Foundational Concepts, Assumptions, and Constraints
CPA: Financial Reporting
AACSB: Analytic
Exercise 2
For each item below, indicate whether the item is a(an) (1) Fundamental Qualitative Characteristic, (2)
Enhancing Qualitative Characteristic, (3) Element of the Financial Statements, (4) Concept, or (5)
Constraint.
Example:
(3)_ Asset (An asset is an element of financial statements.)
____ a) Relevance
____ b) Comparability
____ c) Cost-Benefit
____ d) Timeliness
____ e) Revenue
____ f) Owner’s equity
____ g) Faithful representation
____ h) Going concern
____ i) Reporting entity
____ j) Monetary unit
Solution 2 (5 min.)
a) (1)
b) (2)
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
11-4
Paul Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak (Test Bank All Chapters,
100% Original Verified, A+ Grade) (Chapter 11-18) Answers At The End Of Each Chapte
CHAPTER 11
FINANCIAL REPORTING CONCEPTS
CHAPTER STUDY OBJECTIVES
1. Explain the importance of having a conceptual framework of accounting, and list the key
components. The conceptual framework ensures that there is a consistent and coherent set of
accounting standards. Key components of the conceptual framework are the: (1) objective of financial
reporting; (2) elements of the financial statements; (3) qualitative characteristics; (4) recognition and
measurement concepts; and (5) foundational concepts, assumptions, and constraints.
2. Explain the objective of financial reporting, and define the elements of the financial statements.
The objective of financial reporting is to provide useful information for investors and creditors in
making decisions in their capacity as capital providers. The elements are assets, liabilities, equity,
revenue, and expense. Each element has a specific definition. The definitions provide important
guidance on when an element should be recognized.
3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to
financial reporting situations. The fundamental qualitative characteristics are relevance and faithful
representation. Financial information has relevance if it makes a difference in a decision. Materiality is
an important component of relevance. An item is material when it is likely to influence the decision of
a reasonably careful investor or creditor. Information is faithfully represented when it shows the
economic reality and is complete, neutral, and free from material error.
The enhancing qualitative characteristics are comparability, verifiability, timeliness, and
understandability. Comparability enables users to identify the similarities and differences between
companies. The consistent use of accounting policies from year to year is part of the comparability
characteristic. Information is verifiable if two knowledgeable and independent people would
generally agree that it faithfully represents the economic reality. Timeliness means that financial
information is provided when it is still highly useful for decision-making. Understandability enables
reasonably informed users to interpret and comprehend the meaning of the information provided in
the financial statements.
4. Apply the recognition and measurement criteria of the conceptual framework to financial
reporting situations. General recognition criteria require that elements be recognized in the financial
statements when it is probable that any economic benefit associated with the item will flow to or from
the business and the item has a cost or value that can be measured or estimated with a reasonable
amount of reliability. There are two approaches to revenue recognition: (1) contract-based and (2)
earnings. The contract-based approach requires that revenue be recognized when promised goods or
services are transferred and the amount reflects the consideration the business expects to receive.
The earnings approach requires that revenue be recognized when the earnings process is complete,
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
11-1
,Test Bank for Accounting Principles, Eighth Canadian Edition
the risks and rewards of ownership have been transferred, and the amount can be reliably measured.
Expenses are recognized when there is a decrease in an asset or increase in a liability, excluding
transactions with owners, which result in a decrease in owners’ equity. Four measurements used in
accounting are (1) historical cost, (2) current cost, (3) realizable value, and (4) present value. Incorrect
application of the basic recognition and measurement concepts can lead to material misstatements in
the financial statements. Incorrect application can be due to error or intentional misstatement.
5. Apply the foundational concepts, assumptions, and constraints of the conceptual framework to
financial reporting situations. The foundational concepts, assumptions, and constraints form the
bedrock of accounting and are used to achieve the objective of financial reporting. The reporting
entity concept requires that accounting for a reporting entity’s activities be kept separate and distinct
from the accounting for the activities of its owner and all other reporting entities. The going concern
assumption assumes that the company will continue operating for the foreseeable future. The
monetary unit concept means that money is the common denominator of economic activity. The
periodicity concept guides businesses in dividing up their economic activities into distinct time
periods. The cost constraint is a pervasive constraint that ensures the value of the information
provided is greater than the cost of providing it. The full disclosure concept requires companies to
fully disclose circumstances and events that make a difference to financial statement users.
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
11-2
,Test Bank for Accounting Principles, Eighth Canadian Edition
EXERCISES
Exercise 1
The conceptual framework for accounting discusses the following:
Code:
A Objective of Financial Reporting
B Qualitative Characteristics of Accounting Information
C Elements of Financial Statements
Instructions
For each item below, indicate the area of the conceptual framework that pertains to that item by
selecting the appropriate code.
Example:
C Asset (An asset is an element of financial statements.)
____ 1. Information that is helpful in assessing management’s performance
____ 2. Owners' equity
____ 3. Timeliness
____ 4. Neutral
____ 5. Expense
____ 6. Confirmatory value
____ 7 Faithful representation
____ 8 Comparability-consistency
____ 9. Information that is useful in making resource allocation decisions
____ 10 Full disclosure principle
Solution 1 (5 min.)
1. A
2. C
3. B
4. B
5. C
6. B
7. B
8. B
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
11-3
, Test Bank for Accounting Principles, Eighth Canadian Edition
9. A
10. B
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Explain the importance of having a conceptual framework of accounting, and list
the key components.
Section Reference: The Conceptual Framework of Accounting
Learning Objective: Explain the objective of financial reporting, and define the elements of the
financial statements.
Section Reference: The Objective of Financial Reporting
Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the
conceptual framework to financial reporting situations.
Section Reference: Qualitative Characteristics of Useful Financial Information
Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual
framework to financial reporting situations.
Section Reference: Foundational Concepts, Assumptions, and Constraints
CPA: Financial Reporting
AACSB: Analytic
Exercise 2
For each item below, indicate whether the item is a(an) (1) Fundamental Qualitative Characteristic, (2)
Enhancing Qualitative Characteristic, (3) Element of the Financial Statements, (4) Concept, or (5)
Constraint.
Example:
(3)_ Asset (An asset is an element of financial statements.)
____ a) Relevance
____ b) Comparability
____ c) Cost-Benefit
____ d) Timeliness
____ e) Revenue
____ f) Owner’s equity
____ g) Faithful representation
____ h) Going concern
____ i) Reporting entity
____ j) Monetary unit
Solution 2 (5 min.)
a) (1)
b) (2)
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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