Chapter One Flashcards
(42 cards)
The purpose of financial statements are to give information to its users about
Financial position (assets and liabilities)
Financial performance (profit and loss)
Changes in financial position (cash flows)
What are the primary users of final accounts?
Existing and potential investors - investors are the providers of capital to a business
Lenders - lenders are a course of finance to a business, such as banks.
Other creditors - all provide finance to a business, normally in the short term such as trade creditors
The primary users need information that is useful in:
Making decisions about providing resources to an entity
Making assessments about the amount, timing and certainty of future cash flows; and
Assessing the supervisors of the organisations managements
What is an information gap?
The difference between the information a user needs and the information a user can acess
What business types have an information gap?
A sole trader and partnership will not have a gap, however, users of company financial statements will have a gap
List some of the users that would be interested in the final accounts of an entity
Managers
Employees
Investors
Lenders
Suppliers
Customers
What is going concern
The financial statements are normally prepared on the assumption that an entity will continue in operation for the foreseeable future
What is accrual accounting
A fundamental accounting concept that states that income and expenses shown in the statement of profit and loss should be those that were earned or incurrred during the period rather than simply the cash recieved or paid
What else is accrual accounting referred to as
Accruals concept or the matching principle
What else is accrual accounting referred to as
Accruals concept or the matching principle
What can the accruals concept mean
Income and expenses are recorded in the financial statement when the business has earned the income or incurred the cost rather than when cash is recieved or paid
Accruals concept means that income and costs are matched ..
To each other so that the cost of buying something that a business sells is in the same financial period as the income from the sale(regardless of when the cash is received or paid)
Items are reported in the financial statements of the period to which they relate in what concept
The accruals concept
What is a business entity
The transaction of a business must be recorded separately from the transactions of its owners. The preparer of financial statements must be alert to personal transactions of the owner being recorded as business transactions
What is materiality
Info is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions made by primary users.
Or due to its size or its nature
What is consistency
Refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.
It helps ensure that information is comparable over time
What is prudence
The exercise of caution when making judgements. The exercise of prudence when preparing financial statements requires that asset, income and profit are not overstated and that liabilities, expenses and losses are not understated.
What is money measurement
The principal of money measurement requirement requires that a transactions should only be included in the final accounts if it can be measured in monetary terms
What do the qualitative characteristics of useful financial information identify?
The types of information that are likely to be most useful to existing and potential investors, lenders and other creditors for making decisions about the reporting entity on the basis of information in its financial report
What are the two fundamental qualitative characteristics of useful financial information
Relevance and faithful representation
What is relevance
Info is relevant if it can make a difference to the decisions made by users. In deciding whether information is relevant it is necessary to consider the nature of the information and whether it is material in the context of the financial statements
What is faithful representation
Info that provides a faithful representation of a financial item or situation must be complete, neutral and free from material error.
What are the further four enhancing qualitative characteristics
Comparability
Verifiability
Timeliness
Understandability
What is comparability
It must be possible to compare the results of different entities or to compare the results of an entity from one year to the next.
The principle to consistency is related to comparability
