Purchase Solution

GAAP Application - Conceptional Framework of Accounting

Not what you're looking for?

Ask Custom Question

The Conceptual Framework allows for the systematic adaptation of accounting standards to a changing business environment. The FASB uses the conceptual framework to aid in an organized and consistent development of new accounting standards. The conceptual framework outlines the objectives of financial reporting and the qualities of good accounting information, precisely defines commonly used terms such as asset and revenue, and provides guidance about appropriate recognition, measurement, and reporting. Understanding the terminology associated with the framework is imperative.

Match the numbered statements below with the lettered terms. An answer (letter) may used more than once, and some terms require more than one answer (letter).
1. Key ingredients in quality of relevance.
2. Traditional assumptions that influence the FASB's conceptual framework.
3. The idea that information should represent what it purports to represent.
4. An important constraint relating to costs and benefits.
5. An example of conservatism
6. The availability of information when it is needed.
7. Recording an item in the accounting records.
8. Determines the threshold for recognition.
9. Implies consensus.
10. Transactions between independent parties.

a) Cost-effectiveness
b) Representational faithfulness
c) Recognition
d) Verifiability
e) Time periods
f) Unrealized
g) Completeness
h) Timeliness
i) Materiality
j) Predictive value
k) Economic entity
l) Lower-of-cost-or-market rule
m) Phrenology
n) Arm's-length transactions

Now that you have reviewed the terminology, for each situation listed below, indicate by letter the appropriate qualitative characteristic(s) or accounting concept(s) applied. A letter may be used more than once, and more than one characteristic or concept may apply to a particular situation. Explain why you chose your answer.
1. Goodwill is recorded in the accounts only when it arises from the purchase of another entity at a price higher than the fair market value of the purchased entity's identifiable assets.
2. Land is valued at cost.
3. All payments out of petty cash are debited to Miscellaneous Expense.
4. Plant assets are classified separately as land or buildings, with an accumulated depre-ciation account for buildings.
5. Periodic payments of $1,500 per month for services of H. Hay, who is the sole propri-etor of the company, are reported as withdrawals.
6. Small tools used by a large manufacturing firm are recorded as expenses when purchased.
7. Investments in equity securities are initially recorded at cost.
8. A retail store estimates inventory rather than taking a complete physical count for purposes of preparing monthly financial statements.
9. A note describing the company's possible liability in a lawsuit is included with the financial statements even though no formal liability exists at the balance sheet date.
10. Depreciation on plant assets is consistently computed each year by the straight-line method.

a) Understandability
b) Verifiability
c) Timeliness
d) Representational faithfulness
e) Neutrality
f) Relevance
g) Going concern
h) Economic entity
i) Historical cost
j) Measurability
k) Materiality
l) Comparability

I have most of the answers completed, but want to make sure I'm on the right track with my thinking & would like confirmation from a professional. Thanks.

Purchase this Solution

Solution Summary

I have put my responses in Excel (attached). There are a few "close calls" and so your particular textbook may or may not agree with all of these.

I have also attached a diagram that might be helpful to you.

Solution provided by:
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
Recent Feedback
  • "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
  • "Thank, this is more clear to me now."
  • "Awesome job! "
  • "ty"
  • "Great Analysis, thank you so much"
Purchase this Solution

Free BrainMass Quizzes
Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.


This tests some key elements of major motivation theories.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.