Ch 2 Financial Asset Essay

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A. Conceptual Frameworks for Financial Accounting as Strategies to Meet Market Demands for Info
For illustration purposes, the following will be sketched out as a business plan for an automobile manufacturer
Relate it to the conceptual framework for financial reporting
The conceptual framework for financial reporting are laid out as International Financial Reporting Standards (IFRS)

1. Sketch of a business plan for a carmaker
Mgmt. team of an automobile manufacturer
Thinking about launching a new product
Planning process as the follow
a. Assessing demand
Need to be selective about choosing a target market
Understand the needs of the group
Identify the desirable product characteristics
b. Supply Planning
Identify potential product components ( to meet customer needs)
Specific product design
Take into account the technological + economical feasibility of the designs
May have numerous simplifying assumptions

B. Components of the IFRS Framework
Detailed IFRS Framework

1. Users
Identifies a wide range of users
“The users of financial statements include present & potential investors, EE, lenders, suppliers & other trade creditors, customers, governments, and their agencies and the public”
Reporting standards try to accommodate the diverse needs of all potential users
Product will not have as much appeal as one that is targeted to smaller demographic
May be less appropriate for a particular user group
2. Users’ needs & objectives
IFRS describes the needs that should be satisfied by financial statement as follow:
“the objective financial statements is to provide information about:
The financial position (at a point in time) (B/S)
Performance & changes in financial position to an entity (over a
Period of time) (I/S)
4 types of Economic Decisions
a. Prediction of future CF, Dividends, Earnings
Useful for estimating the value of a company
b. Assessment of Risk
How sensitive are the FC to changes in sales?
What would happen in the worst-case scenario?
What is the probability of bankruptcy?
Will a lender recover the value of a loan in case of bankruptcy?
Degree of variation in future outcomes
c. Contracting & Compliance
For example:
Management bonuses depends on firm income d.Assessment of stewardship and competence
A separation of ownership & management
Provides the owners the information to monitor mgmt.’s performance
Alleviate Moral Hazard
To see if they used the resources effectively & efficiently
3. Qualitative Characteristics a Understandability
The ease with which users are able comprehend financial reports b Relevance
Relevance:
The ability to influence users’ economic decisions
Matter of degree
Information that is able to provide feedback about past performance
Help make predictions
Materiality:
Whether the omission or misstatement of a particular piece of information would influence users’ economic decisions c Reliability
The lack of errors, bias, the ability of users to depend on the information as a faithful representation of what is purported to be represented. 5 attributes are listed below (FSNPCC)
Faithful Representation
The extent to which financial statements reflect the underlying transactions, resources, claims
Substance over Form
The presentation of financial information according to the economic substance of the transactions rather its legal form
Neutrality
The extent to which information is free from bias
Prudence (Conservatism)
The inclusion of caution in the exercise of judgment in making estimates under uncertainty so as to avoid overstating performance & financial position
e.g. understate of expenses & liability
Completeness
The inclusion of all material items in the financial statements d Comparability
Refers to the ability to compare one set of financial statements with another
Can be with the financial statements of the same enterprise in a different year OR with those of a different enterprise
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