Chapter 2
1. What is a conceptual framework ? Why is a conceptual framework necessary in
financial accounting ?
Answer :
The idea of a conceptual framework was created for the first time because the
forms and types of financial reports were so diverse that a direction for the preparation
of financial reports was needed. The conceptual framework is a frame of mind for a
company that originates from an objective, namely to communicate the financial
condition of an economic entity. Within the conceptual framework there are various
aspects to facilitate the preparation of financial reports such as what boundaries are in
the financial report, choosing what transactions to include in the report, how they
should choose which ones should be summarized, how their financial reports can be
recognized by various backgrounds , etc. The need for a conceptual framework is very
important, because in making rules, critical decision making for companies requires a
clear and defined corporate conceptual body. Of course, it is possible to change or
develop the conceptual framework but this must be consistent with the main objective
over time so that it will produce useful results. Also the conceptual framework is also
useful in solving practical problems faster because of the existence of this conceptual
framework.
2. What is the primary objective of financial reporting ?
Answer :
Financial reports have the primary objective of providing information to potential
investors and creditors to facilitate financial decision making in providing funds to an
economic entity. Available information that is useful for capital providers also has
information that is useful for non-providers of capital, such as for example suppliers,
employees, distributors.
3. What is meant by the term “qualitative characteristics of accounting information” ?
Answer :
Qualitative characteristics of accounting information are an alternative for selecting
and qualifying various kinds of information to classify what is informative and useful,
which is not for the purpose of facilitating decision making. Qualitative characterization
includes relevance, namely the information conveyed can affect decision making and
faithful representation or reliability is that the data submitted is not fabricated and is
truly honest.
4. Briefly describe the two fundamental qualities of useful accounting information.
Answer :
Two fundamental qualities include relevance and faithful representation. The
relevance itself consists of predict value, which is where an economic entity is able to
predict how its financial health will be in the future or until the next financial reporting
period. This predictability affects the quality of the reporting economic entity. Next is
confirmatory, which is how to confirm the real time results of predictions that have been
made in the previous period and must be rational and true in the event of failure of
predictions, then there is materiality, namely whether the information added or removed
in the financial statements has an effect or not.
In an faithful representation there are 3 important aspects, namely complete, in this
case what is meant is complete financial reporting according to mandatory standards so
that it can be conveyed properly. The quality of a report can be seen from the
completeness of the content of financial reporting. Furthermore, it is neutral, financial
reporting must be neutral, not in favor of economic entities, both internal and external,
so that the results issued are as objective as possible. Finally, it is free from errors, errors
in financial reporting are certainly something that is normal, but in this case it is
expected that financial reporting must be straightforward and clear in conveying the
causes of errors, namely by including information as needed.
5. How are materiality (and immateriality) related to the proper presentation of financial
statements ?
Answer :
The existence of materiality certainly greatly affects the proper presentation of
financial statements. If the information presented is omitted or incorrect, it can affect
the financial decisions of users of the financial statements of an economic entity.
Materiality company measures whether the information available is material, and needs
to consider whether it will cause significant changes if the information is present or not
in the report and it is necessary to consider whether the benefits of the information are
worth the price issued.
6. What are the enhancing qualities of the qualitative characteristics ? What is the role of
enhancing qualities in the Conceptual Framework ?
Answer :
Enhancing quality is intended to be a complement to qualitative fundamentals,
where it having big role to separate useful and less useful information. Enhancing
quality has four aspects, namely, comparability, where the results of financial reports
must have comparable information so that it can make it easier for report users to
compare between economic entities. Furthermore, there is verifiability, which is a
situation where several independent measurements of information are carried out by
different people, using the same method and getting similar results. The next step is
timeliness, which is the information that must reach the decision maker before the
value of the information loses its meaning to influence the outcome of the decision. the
last one is understandability, which is where the quality of the information available
must be understandable to everyone using the financial statements and easily observe
the significance of the information.
7. Define the basic elements of financial statements.
Answer :
In making financial reports, of course there will be basic elements as elements of
information in financial reports. The basic elements are:
a) Assets : resources acquired by an entity in the past that are stored for a
specified period of time that are expected to provide economic benefits to the
entity in the future.
b) Liability : is debt incurred in the past by an economic entity which is expected
to generate benefits for the entity in the current period, and the entity has an
obligation to pay it in an agreed form in the future.
c) Equity : is the remaining rights owned by an economic entity after fulfilling its
obligations, in which there are elements of income and expenses.
d) Income : an event where when there is an increase in economic flows during
one financial accounting period in the form of income flows of economic
entities, an increase in assets, and a decrease in liabilities followed by an
increase in equity.
e) Expenses : an event where when there is an decreases in economic flows
during one financial accounting period in the form of outcome flows of
economic entities, an decreases in assets, and a increase in liabilities followed
by an decreases in equity.
8. Describe the basic assumptions of accounting.
Answer :
The basic assumptions of accounting are those that evolve along with the
conceptual framework. The basic assumptions consist of the economic entities
assumptions, namely those activities for which accountability can be identified. Next is
the going concern assumption, where this assumption is based on the long-term
sustainability of a company even though there have been many business failures, the
company has a great opportunity to continue its business. Next is the monetary unit
assumption, this assumption is based on the fact that the monetary unit is the most
important unit because it is effective in conveying information to relevant parties
regarding changes in economic entities. Next is the periodicity assumption, this
assumption is based on the fact that the results of reports on the activities of economic
entities can be reported accurately when the company has been liquidated, but this
cannot be done because decision makers cannot wait until that long so a solution is made
with periodic submissions to company leaders.