Final answer:
The conceptual framework of financial accounting consists of three levels: the first level outlines the basic objective of financial reporting, the second level discusses the qualitative characteristics and elements of financial information, and the third level details the principles governing financial reports, including elements, assumptions, principles, and constraints of accounting.
Step-by-step explanation:
The conceptual framework of financial accounting consists of three levels that help ensure that financial reporting achieves its basic objective of providing useful information to users for decision-making purposes. The framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and prescribes the nature, function, and limits of financial accounting and financial statements.
The first level, also known as the objective of financial reporting, is the foundation which specifies that the purpose of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.
The second level addresses the qualitative characteristics and elements of financial information. This includes two fundamental qualitative characteristics (relevance and faithful representation) and four enhancing qualitative characteristics (comparability, verifiability, timeliness, and understandability). The elements of financial statements include assets, liabilities, equity, income, and expenses.
The third level provides the principles that guide the recognition, measurement, and presentation of items within the financial statements. This encompasses assumptions such as the economic entity, going concern, and monetary unit principles. The elements of financial statements, basic assumptions, and principles, as well as constraints like cost-benefit and materiality, are considered as well.