Accounting policies

Question 1

Relevance

Answer 1

Understand that financial information is relevant only if it affects the business decisions

Question 2

Reliabilitiy

Answer 2

Understand that financial information is reliable only if it can be depended upon to represent actual events and transactions

Question 3

Understandibility

Answer 3

Financial reports must be capable of being understood by the users of the report

Question 4

Comparability

Answer 4

Financial statements can be compared with those from previous years and with similiar businesses.

Question 5

Relevance factors

Answer 5

Financial information must be:
- Available in time
- Must help in predictions
- Help in feedback
- Make a difference in the decision

Question 6

Reliability factors

Answer 6

Financial information must be:
- Free from significant errors
- Free from bias
- Capable of being independently verified (by others)
- Faithful in representing the economic condition
- Believable

Question 7

Understandibility factors

Answer 7

Financial information must be:

• Interpreted by the receiver of the message in the same sense in which the sender had sent it
• clear and concise information that can be understood by the user

Question 8

Comparability factors:

Answer 8

Financial information must be:
- Must use same accounting principles throughout the years like consistency
- Use common unit of measurement and format of reporting
- Belong to the same accounting period

Question 9

Accounting policies definition:

Answer 9

Rules and guidelines that help a company prepare and present its financial information

Question 10

Factors to consider when comapring business performance with others

Answer 10

• same business size
• same type of business (sole trader/partnership)
• same industry of business
• same accounting period
• same type of expenses
• same type of goods sold
• same principles like depreciation method
• same location
• same capital structure (equity)

Question 11

Duality

Answer 11

Each transaction has a two-sided affect, one is debit and the other is credit

Question 12

Going concern

Answer 12

Accounting records are maintained on the basis that the business will continue to operate long enough to trade in the foreseeable future

Question 13

Realisation

Answer 13

Revenue is only recognised as being earned when the legal ownership of goods passes from seller to buyer

Question 14

Historical cost

Answer 14

All assets and expenses are recorded at their actual costs and not their market value

Question 15

Business entity

Answer 15

The transactions of the owners are kept seperate from the business’s transactions

Question 16

Money measurement

Answer 16

Only information which can be expressed in monetary terms can be recorded in accounting records

Question 17

Materiality

Answer 17

Individual items of low value which will not significantly affect profits or assets of business do not need to be recorded seperately

(small capital expenditure treated as revenue expenditure)

Question 18

Consistency

Answer 18

Accounting methods must be used consistently from one accounting period to the next

Question 19

Prudence

Answer 19

Profits and assets should not be overstated and losses and liabilities should not be understaded

Question 20

Matching

Answer 20

Revenue of an accounting period is macthed against costs of the same period

Question 21

Internation accounting standard meaning

Answer 21

A set of accounting rules which make it easier to compare businesses around the world, increasing transparency and trust in financial reporting

Question 22

Ways in which IAS can improve quality and usefuless of information presented in financial statements

Answer 22

Reducing areas of differences and variety of accounting practices, ** improving comparability** between different business and countries

improving reliability of accounting information and ensuring it is free from significant error and bias by insisting common standards are followed and maintained

increasing the understandibility of accounting information, as the standards require it to be clear, well presented and to explain key issues