Chapter 1: The Role of Accounting (Part 2) Flashcards
What is a cash flow statement?
A report on the firm’s cash inflows and outflows, and the change in its cash balance over a period
What is an income statement?
A report on the firm’s revenues, expenses and profit from its trading activities over a period
What is a balance sheet?
A report on the firm’s assets and liabilities at a particular point in time
What are the four common accounting assumptions?
Accounting entity assumption, going concern assumption, period assumption and accrual basis assumption
What does the accounting entity assumption state?
The business records of the entity are kept completely seperate from those of the owner, as well as other entities
What does the going concern assumption state?
The business will continue to operate into the future, and its records are kept on this basis
What does the period assumption state?
Reports are prepared for a particular period of time, such as a month or a year, in order to obtain comparability of results
What is the length of a period?
It can be as short as the owner requires, but it can be no longer than a year
What does the accrual basis assumption state?
Revenues are recognised when earned at the point of sale and expenses are recognised when incurred, therefore profit is calculated as revenue less expenses in a particular period
What are the six qualitative characteristics?
Relevance, comparability, timeliness, understandability, verifiability and faithful representation
What does relevance state?
Financial information must be capable of making a difference to the decision making of users, by helping them to form predictions or change previous evaluations
What does materiality refer to?
The size or significance of financial information, determined by considering whether omitting it from the report could influence decisions that users make
What happens if financial information is immaterial?
They are not relevant to decision-making and thus do not need to be included in accounting reports
What does faithful representation state?
Financial information should be a faithful representation of real-world economic events, complete, free from material error and without bias
What does verifiability state?
Financial information should allow different knowledgeable and independent observers to reach a consensus that an event is faithfully represented
