accounting choice & characteristics

Question 1

why is choice on how to report bad?

Answer 1

comparability : cannot easily compare similar companies if reported differently. can mislead users

information asymmetry : preparers v users. preparers can manipulate figures to make firm look better, and make accounting choices in their own self interest

Question 2

what is materiality?

Answer 2

info is “material” if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of users of statements (potential investors, directors etc)

Question 3

how do we choose how to report?

Answer 3

• conventions (GAAP, IFRS)
• general principles & concepts
• qualitative characteristics
• regulation
• auditing

Question 4

what does “true and fair” mean?

Answer 4

accurate & unbiased
free from material misstatement

Question 5

state and explain the two qualitative characteristics.

Answer 5

faithful representation : must show what is truly going on in the firm. complete, neutral, free from error

relevant : gives values on predictive (future) or confirmatory (past) figures

Question 6

state and explain the four enhanced qualitative characteristics.

Answer 6

timeliness : statements must be provided to users in a timely manner (within 9mths)

verifiability : independent observers must be able to confirm balances & transactions

understandability : info & data must be clear & concise so it can be digested by all users easily - not just professionals

comparability : same accounting methods must be used to allow users a clear & easy comparison

Question 7

what are the problems with adhering to the qualitative characteristics?

Answer 7

• still some subjectivity
• relevance v reliability
• cost v benefit
• potential conflicts between criterias

Question 8

state and explain the five accounting principles.

Answer 8

accruals : must match income & expenses to the period, not when the cash is received

prudence : profits when realised, liabilities when probable ie. aim to undervalue assets, overstate liabilities. only recognise revenue when risks and rewards have been transferred

going concern : presumed that the firm will run for the forseeable future (12mths from the balance sheet date)

consistency : need to be consistent in their accounting principles (ie. choosing which method of depreciation)

A&L must be shown in full : shouldnt be netted off. dont combine payables & receivables