Accounting framework-part 3

Qualitative characteristics

• Four PRINCIPAL qualitative characteristics (CRRU):
• Relevance-capacity of the information to make difference in a decision
• Predicitive value-users can accurately forecast the outcomes of events
• Feedback value-users can confirm or correct earlier expectations
• Timeliness
• Reliability-quality of information that assures that infos are free from bias or error
• Faithful representation-actual effects should be properly accounted
• Substance over form-content of the the documents should prevail over its form
• Neutrality-FS should not be bias
• Conservatism or prudence-least effect on equity should be chosen
• recognition of errors should be understatement of assets rather than overstatement
• lower figure should be selected
• contingent loss is recognized as "provision" when it is probable and measurable.
• contingent gain SHOULD not be recognized but disclosed only.
• Completeness-"principle of full disclosure"
• Notes to financial statements-necessary disclosure to supplement financial statement
• Understandability-financial info should be comprehensible and intelligible
• Comparability-comparable info should present similarities and dissimilarities
• Comparability within entity-comparability from period to period
• horizontal comparibility
• intracomparability
• Comparability across or between entities
• dimensional comparability
• intercomparability

Accounting Constraints-factors that may affect the relevance and reliability of FS

• Timeliness
• Cost-benefit
• cost should not exceed benefit
• Materiality-"Doctrine of Convenience"
• should consider material info only
• When is an item material?"-based on judgment and common sense
• Factors:
• Size of an item
• Nature of the item

Elements of Financial Statement

1. Assets
2. Liabilities
3. Equity
4. Income
5. Expense

4 main recognition principle

1. Asset recognition principle
1. inflow of future economic benefits is PROBABLE
2. Cost of asset can be measured RELIABLY
2. Liability recognition principle
1. outflow of future economic benefits is PROBABLE
2. amount of obligation can be measured RELIABLY
3. Income recognition principle-point of sale
1. inflow of future economic benefits is PROBABLE as a RESULT OF INCREASE IN ASSET or DECREASE IN LIABILITY
2. economic benefits can be measure RELIABLY
• Revenue-ordinary course of business
• Gains-extraordinary course of business 
4. Expense recognition principle
1. outflow of future economic benefits is PROBABLE as a RESULT OF DECREASE IN ASSET or INCREASE IN LIABILITY
2. decrease in economic benefits can be measure reliably
• expense-ordinary course of business
• losses-extraordinary course of business

Exception to "point of sale" income recognition

• installment method-point of collection
• cost of recovery method-point of collection except collection are applied to cost first
• cash method-revenue is recognized when received
• percentage of completion-stage of completion
• production method-point of production

 Matching principle

• Cause and effect association-expense is recognized when revenue is recognized, "strict matching concept"
• Systematic and rational allocation-some cost are expensed by simply allocating them over the periods
• Immediate recognition-cost incurred are expensed outright

Measurement-process of determining monetary amount

• Historical cost-fair value at the time of acquisition
• Current cost-amount that would have to be paid if acquired currently
• Realizable value-amount could have been paid if disposed currently
• Present value-discounted value of future net cash inflow