DAIF Task 3 Flashcards
What is GAAP
It refers to ‘generally accepted accounting principles’.
What is GAAP
It refers to ‘generally accepted accounting principles’.
In most countries, GAAP does not have any statutory or regulatory authority or definition but the major components are normally:
- Accounting standards
- National company law
- Stock exchange requirements
Which organisation is responsible for setting standards and what are 2 examples of these standards?
International accounting standards board (IASB).
- Adopted existing IAS
- International financial reporting standards (IFRS).
What is the purpose of accounting standards?
Credibility- accounting standards are necessary to ensure financial reports give a true and fair view of the company.
Comparability- by having financial statements prepared on a consistent basis, inter-company comparisons can be made.
Discipline- accounting standards detail how transactions should be recognised in the FS, meaning there is less scope for manipulation. Therefore, directors must ensure the FS gives a ‘true and fair view’.
What are the duties and responsibilities of the directors?
- Responsible for keeping proper company accounting records.
- Responsible for preparing the company’s annual FS, having them audited (if the company is of a certain size), and presenting them to the shareholders in a general meeting.
- the shareholders must approve the FS at the general meeting and then the directors are responsible for filing them with companies house.
- Directors must ensure the accounts are filed with companies house within the prescribed period after y/e.
What is meant by ‘true and fair view’?
The FS must show a true and fair view o the companys results for the period and its assets and liabilities at the end of the period.
What is meant by ‘true and fair view’?
The FS must show a true and fair view of the company’s results for the period and its assets and liabilities at the end of the period.
What is the conceptual framework?
Is produced by the IASB and it is a set of principles that underpin the foundations of financial reporting.
What is the objective of general purpose financial reporting?
What is the objective of general-purpose financial reporting?
Is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions relating to providing resources to the entity.
What is accrual accounting?
the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims are recognised in the periods in which they occur, even if the resulting cash receipts and payments occur in a different period.
What are the 2 fundamental qualitative characteristics?
What are the 2 fundamental qualitative characteristics?
Faithful representation and relevance.
What is meant by relevance?
Relevant financial information is capable of making a difference in the decisions made by users. I.e. if it has
- predictive value
- confirmatory value
What is meant by materiality?
Information is material if omitting, misstating, or obscuring it could influence decisions that primary users of general-purpose financial statements make on the basis of financial information.
What is meant by faithful representation?
Financial information must also faithfully represent the substance of the phenomena that it purports to represent.
A perfect faithful representation would be:
- Complete
- Neutral
- Free from error
What are the 4 enhancing qualitative characteristics?
Comparability, Verifiability, Timeliness, Understandability
What is meant by verifiability?
Assures users that information faithfully represents the economic phenomenon it purports to represent. Verification can either be direct or indirect.
What is meant by Timeliness?
Having information available to decision-makers in time to be capable of influencing their decisions.
What is meant by understandability?
Classifying, characterising, and presenting information clearly and concisely so that users can comprehend the financial information available.
What is the cost constraint on useful financial reporting?
It refers to the consideration of whether the benefits of reporting particular information justify the costs incurred to provide and use that information.
What is the underlying assumption?
The FS are normally prepared on the assumption that an entity is a going concern and will continue to operate for the foreseeable future. It is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading.
What are the elements of the financial statements?
Assets, Liabilities, Equity, Income, Expenses
What is meant by an asset?
A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
