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Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne’s supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice.Instructions

(a) Help Wayne recognize the purpose of and benefit of a conceptual framework.

(b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background.

Short Answer

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(a) The purpose of a conceptual framework is to help the users of the financial statements in analyzing the information included in the financial statements, as well as the benefit of it is to authorize a standard-setting body to present more helpful and uniform pronouncements over time.

(b) Statement of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background are “Objectives of Financial Reporting by Business Enterprise”.

Step by step solution

01

Meaning of Conceptual Framework

A conceptual framework is a system of concepts and purposes that result in the formation of a uniform set of principles and conventions. A conceptual framework is needed so that establishing standards can be correct and helpful.

02

Purpose and benefit of a conceptual framework

A conceptual framework is identical to the constitution. Its purpose is to supply a logical system of interconnected fundamentals and objectives that describes the nature, purpose, and curbs of financial statements and accounting. A well-developed conceptual framework helps the Financial Accounting Standards Board (FASB) to present more uniform and beneficial standards in the future.

The benefit of a conceptual framework is that it increases the confidence and confidence of the users of the financial statements. It assists professional accountants in more rapidly solving rising practical problems. It helps in comparing the financial statements of one company with the other. It provides support to the body responsible for creating accounting standards.

03

Statements of Financial Accounting issued by the FASB

Statements issued by Financial Accounting Standards Board (FASB) that are associated with the concern include:

  • “Qualitative Characteristics of Accounting Information” Inspects the features that make accounting information beneficial.
  • “Elements of Financial Statements of Business Enterprises” gives an illustration of the broad groups of financial statement items.

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Most popular questions from this chapter

Homer Winslow and Jane Alexander are discussing various aspects of the FASB’s concepts statement on the objective of financial reporting. Homer indicates that this pronouncement provides little, if any, guidance to the practicing professional in resolving accounting controversies. He believes that the statement provides such broad guidelines that it would be impossible to apply the objective to present-day reporting problems. Jane concedes this point but indicates that the objective is still needed to provide a starting point for the FASB in helping to improve financial reporting.Instructions

  1. Indicate the basic objective established in the conceptual framework.
  2. What do you think is the meaning of Jane’s statement that the FASB needs a starting point to resolve accounting controversies?

What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?

Why is it necessary to develop a definitional framework for the basic elements of accounting?

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

Question: The issues that the FASB and IASB must address in developing a conceptual framework include all of the following except:

(a) should the characteristic of relevance be traded-off in favor of information that is verifiable?

(b) should a single measurement method such as historical cost be used?

(c) what are the key elements of asset and liability definitions?

(d) should the role of financial reporting focus on internal decision-making as well as providing information to assist users in decision-making?

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