Unit 6 GAAP Application-Conceptual Framework of Accounting 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 Type your answers in a Word Document, and submit to the Drop Box.