Accounting Documents and Systems Flashcards
(40 cards)
2 fundamental characteristics of the conceptual framework
Relevance and faithful representation
Four enhancing characteristics of the conceptual framework
Verifiability, timeliness, understandability, comparability
What is materiality
Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of financial statements
What is going concern
The entity is viewed as continuing in operation for the foreseeable future (at least the next 12 months). It is assumed that the entity has neither the intention nor the necessity of liquidation or of ceasing to trade
How is an entity valued when it is not a going concern
At its break-up value - amount it would sell for (net-realisable value) if they were sold off individually and the business were broken up
5 elements of a financial statement
Assets, liabilities, income, expenses and capital
What are net assets
Assets less liabilities
What is income
Increases in assets or decreases in liabilities that result in increases in equity (capital)
What is capital
The amount an entity owes to its owner
What is the accrual basis
Items are recognised as assets, liabilities, equity, income and expenses (the elements of a financial statement) when they satisfy the definitions and recognition criteria for those elements in the conceptual framework
According to the accrual basis…
When computing profit, income earned must be matched against the expenditure incurred in earning it
What is the historical cost convention
Transactions are recorded at their cost when they occurred
What’s bad about using historical cost in times of rising prices
It leads to asset values being too low and profits too high
What is the role of ISSB (International Sustainability Standards Board)?
Developing sustainability-related non-financial disclosures
What should underpin the judgements that accountants make
Ethical considerations
What is the IFAC Code of Ethics
Integrity, objectivity, confidentiality, professional competence and due care, professional behaviour
Chartered accountants are expected to demonstrate the highest standards of professional conduct and to take into consideration public interest and maintain the reputation of the accounting profession. This guidance applies to all ICAEW members, students, affiliates, employees of member firms and the firms themselves.
What is the accounting equation?
Assets = capital + liabilities
What does the accounting equation express?
The statement of financial position as an equation
What is the balance sheet equation
An entity’s assets will at all times equal its liabilities plus capital
More complicated accounting equation
Assets = capital + profit - drawings + liabilities
In relation to the business of a sole trader, what does the government and its agencies need to be able to do?
Establish levels of tax revenue and produce national statistics
Characteristics of relevance
Assist users in evaluating past and predicting future events, materiality, confirmatory and predictive value
Characteristics of faithful representation
Neutral, free from error, complete
According to the conceptual framework of financial reporting, information on what areas can help users identify the reporting entity’s financial strengths and weaknesses?
The resources it controls and the claims on an entity’s resource ( the liabilities )
