FAH102H1 Lecture 5: FAH102 Week 5.docx

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apricotrabbit508

15 Apr 2012

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Vernon hyde minor chapter 15: ut pictura poesis. The connection between word and image is therefore deeply embedded within. Western cultural traditions and forms the basis of many traditional interpretations of works of art. Aristotle has also said that a poem and a painting have other fundamental similarities. Both imitate nature, both do so through plot or design, both employ narrative devices, and both tell many of the same stories. Both art and poetry are more truthful than history, which merely chronicles events that in and of themselves contain no great meaning. The greek word mimesis imitation adopted more of a representing definition, rather copying. Words and images, by their very nature seek the ideal. The painter/poet should care more about human action and the human ideal, which has to do with ethical and spiritual meaning, than with beautiful sunsets or perfect trees.

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Can you please summarize what this is saying? It is part of the "TheTop 10 reasons to Fix the FASB's Conceptual Framework"

10. Role for Transactions

Traditionally, great respect has been paid in financial accounting to the entityâs own transactions as reliable sources of information about its assets and liabilities. We speculate that this tradition has roots in the tight rela- tionship between financial reporting and internal control, specifically the fact that an accounting system is the first line of defense against improper transactions. The companyâs own transactions may be sparse, even impoverished, sources of useful information. Far more information resides in the multitudes of transactions exe- cuted by other entities.

Can it be wise to constantly look inward and backward at past one-time events that no longer reflect current con- ditions? For example, could investors who bought shares of Wal-Mart in the 1970s or Enron in late 2000 predict current cash flows from these investments using only their original costs? While their original transactions were evi- dence (although incomplete) of probable cash flow poten- tial at the purchase dates, much more information content resides in recent transactions involving other entities. The same applies to all other assets and liabilities as well.

Suppose the goal is to infer the distribution of red and white marbles in an opaque jar by drawing a sample. How useful is a sample of only one marble? And how useless is it to infer the mix in todayâs jar based on a past sample of one marble from a jar that existed weeks, months, or years ago? We find no rational justification for acting as if useful information is provided by continuing to report the results of an entityâs historical transactions.

We urge the Boards to break the constraining tie between a companyâs financial statements and its unique experiences that may or may not be representative of eco- nomic truth, even at the time they happen.

Who can say an assetâs original purchase price really represented its market value at that date? It was only one event in the population of similar transactions, and thereâs no valid reason to believe it was executed exactly at that distributionâs mean. Instead, a sincere search for reliable financial representations leads to considering the much more useful facts inherent in the many transactions engaged in by others.

The consequence has to be more reliable and useful financial reporting.

chocolatebadger165

Chapter 2 Conceptual Framework for Financial Reporting LO 2.1Describe the usefulness of a conceptual framework.

A _____________________ in accounting is important becauserule-making should be built on and relate to an established body ofconcepts.

The benefits of a soundly developed conceptual framework are asfollows: a) ______________________________________________________b) ______________________________________________________

Which of the following is not true concerning a conceptualframework in accounting? A. It should be a basis forstandard-setting. B. It should allow practical problems to besolved more quickly by reference to it. C. It should be based onfundamental truths that are derived from the laws of nature. D. Allof these answer choices are true.

LO 2.2 Understand the objective of financial reporting. Toprovide financial information about the reporting entity that is_______________ to present and potential equity_________________________________in making decisions aboutproviding resources to the entity.

In other words the objective is_________________________________________________________________________________________________________________________________________.

LO 2.3 Identify the qualitative characteristics of accountinginformation. The qualitative characteristics of accountinginformation distinguish better and more useful information frominferior and less useful information.

a.Fundamental qualities of useful accounting information.

Relevance._______________________________________________________________________________________________________________________________________________________________

(a)Predictive value.:_____________________________________________________________________________________.

(b)Confirmatory value:_________________________________________________________________________________.

(c)Materiality.:_________________________________________________________________________________.

FaithfulRepresentation.___________________________________________________________________________________________________________________________________________________

(a)Completeness_________________________________________________________

(b)Neutrality_______________________________________________________

(c)Free from error___________________________________________________

b.Enhancing Qualities Enhancing qualities complement thefundamental qualities and include:

Comparability__________________________________________________________________.

Consistency_____________________________________________________________________________________________________________________ Verifiability__________________________________________________________________.

Timeliness__________________________________________________________________.Understandabili_____________________________________________________________________________________________________________________

Select the qualitative characteristics for the followingstatements.

(a) Quality of information that assures users that informationrepresents the economic phenomena that it purports torepresent.

(b) Information about an economic phenomenon that corrects pastor present expectations based on previous evaluations.

(d) Includes all the information that is necessary for afaithful representation of the economic phenomena that it purportsto represent.

(e) Quality of information that allows users to comprehend itsmeaning.

SFAC No. 8 identifies the qualitative characteristics that makeaccounting information useful. Presented below are a number ofquestions related to these qualitative characteristics andunderlying constraint.

(a) What is the quality of information that enables users toconfirm or correct prior expectations?

(b) Identify the pervasive constraint developed in theconceptual framework.

(c) The chairman of the SEC at one time noted, âIf it becomesaccepted or expected that accounting principles are determined ormodified in order to secure purposes other than economicmeasurement, we assume a grave risk that confidence in thecredibility of our financial information system will beundermined.â Which qualitative characteristic of accountinginformation should ensure that such a situation will not occur? (Donot use faithful representation.)

(d) Muruyama Corp. switches from FIFO to averagecost to FIFOover a 2-year period. Which qualitative characteristic ofaccounting information is not followed?

(e) Assume that the profession permits the savings and loanindustry to defer losses on investments it sells because immediaterecognition of the loss may have adverse economic consequences onthe industry. Which qualitative characteristic of accountinginformation is not followed? (Do not use relevance or faithfulrepresentation.)

(f) What are the two fundamental qualities that make accountinginformation useful for decisionmaking?

(g) Watteau Inc. does not issue its first-quarter report untilafter the second quarterâs results are reported. Which qualitativecharacteristic of accounting is not followed? (Do not userelevance.)

(h) Predictive value is an ingredient of which of the twofundamental qualities that make accounting information useful fordecision-making purposes?

(i) Duggan, Inc. is the only company in its industry todepreciate its plant assets on a straight-line basis. Whichqualitative characteristic of accounting information may not befollowed?

(j) Roddick Company has attempted to determine the replacementcost of its inventory. Three different appraisers arrive atsubstantially different amounts for this value. The president,nevertheless, decides to report the middle value for externalreporting purposes. Which qualitative characteristic of informationis lacking in these data? (Do not use relevance or faithfulrepresentation.)

If the LIFO inventory method was used last period, it should beused for the current and following periods because of A.consistency. B. verifiability. C. materiality. D. timeliness.

According to the FASB's conceptual framework, what does theconcept of faithful representation include? A. Predictive value B.Materiality C. Verifiability D. Neutrality

Which of the following is not a basic assumption underlying thefinancial accounting structure? A. Going concern assumption B.Economic entity assumption C. Historical cost assumption D.Periodicity assumption

Under current GAAP, inflation is ignored in accounting due tothe A. periodicity assumption. B. economic entity assumption. C.going concern assumption. D. monetary unit assumption.

Valuing assets at liquidation values rather than cost isinconsistent with the A. historical cost principle. B. materialityconstraint. C. periodicity assumption. D. expense recognitionprinciple.

tealox448

Enron's demise. Briely discuss the following:

What did Enron use to hide its debt? What was the main thing that led directly to the downfall of Enron? What was the basic idea underlying Enronâs use of SPEs and why was this flawed?Could Raptor and the other SPEs have actually worked? Tell briefly why or why not? What is a âPonzi schemeâ? Say briefly how it works? What is the classic definition of âmaterialityâ? What is the basic difference of responsibility between a company executive and that companyâs auditor? Was Arthur Andersen aware of the use Enron was making of its SPE? Give two of the things that Arthur Andersen discussed during their âEnron Retention Meeting.â What is the difference between the appearance and the reality of independence? Which is essential for an accounting professional? What is the relation of this difference to Arthur Andersenâs distinction between the level and nature of fees? What is one good reason why even the appearance of lacking independence should be avoided? What are the two kinds of objectivity? What is the basic relationship between rules and principles? Briefly explain what Ken Lay meant when he said that Enron had a âreal time auditâ by Arthur Andersen all the time. Why is the concept of a âreal time auditâ problematic? What is the basic relationship between ethics and legality? What are the ethical considerations that bear upon document destruction? What was the purpose of the SPE called RADR, which was controlled by William Dodson and, vicariously, Michael Kopper? In what way could Enronâs actions justify its corporate culture being call a âculture of greedâ?

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FAH102H1 Lecture 5: FAH102 Week 5.docx

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