Shehab Eldin Mohamed Saber ID: 191133

1- What is a conceptual framework? Why is a conceptual

framework necessary in financial accounting?
A conceptual framework is a coherent system of interrelated objectives and fundamentals
that can lead to consistent standards and that prescribes the nature, function, and limits of
financial accounting and financial statements. A conceptual framework is necessary in
financial accounting for the following reasons:
 It enables the FASB to issue more useful and consistent standards in the future.
 New issues will be more quickly solvable by reference to an existing framework of
basic theory.
 It increases financial statement users' understanding of and confidence in financial
reporting.
 It enhances comparability among companies' financial statements.

2- What are the primary objectives of financial reporting as

indicated in Statement of Financial Accounting Concepts No.
1?
The basic objective is to provide financial information about the reporting entity that is
useful to present and potential equity investors, lenders, and other creditors in making
decisions about providing resources to the entity.

3- What is meant by the term “qualitative characteristics of

accounting information”?
Qualitative characteristics of accounting information" are those characteristics which
contribute to the quality or value of the information. The overriding qualitative
characteristic of accounting information is usefulness for decision-making.

4- Briefly describe the two primary qualities of useful accounting

information
Relevance and faithful representation are the two primary qualities of useful accounting
information. For information to be relevant, it should be capable of making a difference
in a decision by helping users to form predictions about the outcomes of past, present,
and future events or to confirm or correct expectations. Faithful representation of a
measure rests on whether the numbers and descriptions match what really existed or
happened.

5- According to the FASB conceptual framework, the objectives

of financial reporting for business enterprises are based on the
needs of the users of financial statements. Explain the level of
Shehab Eldin Mohamed Saber ID: 191133

sophistication that the Board assumes about the users of

financial statements
In providing information to users of financial statements, the Board relies on general-
purpose financial statements. The intent of such statements is to provide the most useful
information possible at minimal cost to various user groups. Underlying these objectives
is the notion that users need reasonable knowledge of business and financial accounting
matters to understand the information contained in financial statements. This point is
important. It means that in the preparation of financial statements a level of reasonable
competence can be assumed; this has an impact on the way and the extent to which
information is reported.

6- What is the distinction between comparability and

consistency?
Comparability facilitates comparisons between information about two different
enterprises at a particular point in time. Consistency, a type of comparability, facilitates
comparisons between information about the same enterprise at two different points in
time.

7- Why is it necessary to develop a definitional framework for the

basic elements of accounting?
At present, the accounting literature contains many terms that have peculiar and specific
meanings. Some of these terms have been in use for a long period of time, and their
meanings have changed over time. Since the elements of financial statements are the
building blocks with which the statements are constructed, it is necessary to develop a
basic definitional framework for them.

8- Expenses, losses, and distributions to owners are all decreases

in net assets. What are the distinctions among them?
Distributions to owners differ from expenses and losses in that they represent transfers to
owners, and they do not arise from activities intended to produce income. Expenses differ
from losses in that they arise from the entity's ongoing major or central operations.
Losses arise from peripheral or incidental transactions.

9- Revenues, gains, and investments by owners are all increases in

net assets. What are the distinctions among them?
Shehab Eldin Mohamed Saber ID: 191133

Investments by owners differ from revenues and gains in that they represent transfers by
owners to the entity, and they do not arise from activities intended to produce income.
Revenues differ from gains in that they arise from the entity's ongoing major or central
operations. Gains arise from peripheral or incidental transactions.

10- What are the four basic assumptions that underlie the
financial accounting structure?
The four basic assumptions that underlie the financial accounting structure are:
1. An economic entity assumption.
2. A going concern assumption.
3. A monetary unit assumption.
4. A periodicity assumption

11-The life of a business is divided into specific time periods, usually a year, to
measure results of operations for each such time period and to portray
financial conditions at the end of each period.
a- This practice is based on the accounting assumption that the life of the
business consists of a series of time periods and that it is possible to
measure accurately the results of operations for each period. Comment on
the validity and necessity of this assumption
b- What has been the effect of this practice on accounting? What is its
relation to the accrual system? What influence has it had on accounting
entries and methodology?
a- In accounting it is generally agreed that any measures of the success of an
enterprise for periods less than its total life are at best provisional in nature and
subject to correction. Measurement of progress and status for arbitrary time
periods is a practical necessity to serve those who must make decisions. It is not
the result of postulating specific time periods as measurable segments of total life.
b- The practice of periodic measurement has led to many of the most difficult
accounting problems such as inventory pricing, depreciation of long-term assets,
and the necessity for revenue recognition tests. The accrual system calls for
associating related revenues and expenses. This becomes very difficult for an
arbitrary time period with incomplete transactions in process at both the
beginning and the end of the period. A number of accounting practices such as
adjusting entries or the reporting of corrections of prior periods result directly
from efforts to make each period's calculations as accurate as possible and yet
recognizing that they are only provisional in nature.
BE2-1: Discuss whether the changes described in each of the cases below require
recognition in the CPA’s audit report as to consistency. (Assume that the amounts are
material.)
Shehab Eldin Mohamed Saber ID: 191133

a- The company changed its inventory method to FIFO from weighted-average, which
had been used in prior years.
Yes, because a change from weighted-average to FIFO has relevant information that has
a great material impact on the financial statements. Also, a change like this would also
inquire a fixed of previous years that were using the weighted average so now we can
compare each year with the correct amounts.
b- The company disposed of one of the two subsidiaries that had been included in its
consolidated statements for prior years.
Yes, it should be noted that the numbers in prior years included the two subsidiaries, and,
now one has been disposed. It’s very important that it’s stated to show years over year’s
comparison to show if the disposed subsidiaries were providing net gain or loss.
c- The estimated remaining useful life of plant property was reduced because of
obsolescence
Yes, because it will make a difference in the audit report.

BE2-2: Identify which qualitative characteristic of accounting information is best described

in each item below. (Do not use relevance and reliability.)
a- The annual reports of Best Buy Co. are audited by certified public accountants.
Verifiability
b- Black & Decker and Cannondale Corporation both use the FIFO cost flow
assumption.
Comparability
c- Starbucks Corporation has used straight-line depreciation since it began operations
Comparability (consistency)
d- Motorola issues its quarterly reports immediately after each quarter ends.
Timeliness

EX2-6: (Full Disclosure Principle) Presented below are a number of facts related to Weller,
Inc. Assume that no mention of these facts was made in the financial statements and the
related notes
Shehab Eldin Mohamed Saber ID: 191133

Instructions: Assume that you are the auditor of Weller, Inc. and that you have been asked
to explain the appropriate accounting and related disclosure necessary for each of these
items.
a- The company decided that, for the sake of conciseness, only net income should be
reported on the income statement. Details as to revenues, cost of goods sold, and
expenses were omitted.
This is incorrect - you have to show the revenues and the expenses that generated the net
income, that way the users of the statement can ascertain the reason for the profit or loss.

b- Equipment purchases of $170,000 were partly financed during the year through the
issuance of a $110,000 notes payable. The company offset the equipment against the
notes payable and reported plant assets at $60,000
the proper accounting treatment is to show the asset of $170,000 and a liability of $110,000.
This is the proper accounting treatment, as it shows the economic reality of the situation.

c- Weller has reported its ending inventory at $2,100,000 in the financial statements.
No other information related to inventories is presented in the financial statements
and related notes
You must disclose in the footnotes to the financial statements the method that is used to value
inventory, as the method used will make the inventory balance different.

d- The company changed its method of valuing inventories from weighted-average to

FIFO. No mention of this change was made in the financial statements.
the company must restate their inventory balance for all periods presented and disclose
the change in accounting estimate in the footnotes of the financial statements, as well as
include on the income statement a line item explaining the change in net income
attributable during prior periods to the change in accounting estimate.