Lecture 1: The Nature and Purpose of Accounting Regulatory and Conceptual Frameworks Flashcards

1
Q

What is Accounting?

A

The process of identifying, measuring and communicating financial info about an entity for decision making purposes.

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2
Q

What is Management Accounting?

A

Communicating financial info to internal stakeholders - Special Purpose Financial Reports

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3
Q

What is Financial Accounting?

A

Communicating to external stakeholders in General Purpose Financial Repors - bound by GAAP (Generally Accepted Accounting Principles)

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4
Q

Sole Trader (setup and admin, lifetime, reporting status relative to owner, legal status relative to owner, liability of owner, tax implications)

A

Setup and admin: Straighforward + cheap
Lifetime: Limited to life or desire of owner
Reporting status relative to owner: Seperate entity
Legal status relative to owner: Not seperate entity
Liability of owner: Unlimited
Tax implications: Owner reports profit as income

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5
Q

Partnership (setup and admin, lifetime, reporting status relative to owner, legal status relative to owner, liability of owner, tax implications)

A

Setup and admin: Straighforward + cheap
Lifetime: Limited to life or desire of partners
Reporting status relative to owner: Seperate entity
Legal status relative to owner: Not seperate entity
Liability of owner: Unlimited
Tax implications: Partner declares share of profit as income

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6
Q

Company (setup and admin, lifetime, reporting status relative to owner, legal status relative to owner, liability of owner, tax implications)

A

Setup and admin: Complex
Lifetime: Indefinite
Reporting status relative to owner: Seperate entity
Legal status relative to owner: Seperate entity
Liability of owner: Limited
Tax implications: Entity is taxed seperate to owners, shareholders declare dividends as income

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7
Q

Private/Propreitary Company (+classification of large v. small)

A
  • Less than 51 shareholders
  • Restrictions on raising capital and transfer of ownership

Large if meets two or more:
- Operating revenue of 25m
- Total assets of 12.5m
- 50 full time employees

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8
Q

Public Company (+small v. large)

A
  • No restrictions on number of shareholders
  • No restrictions on raising capital or transferring ownership

Split into small and large as there are different accounting requirements under the Corporations Act 2001.
Small:
- Less external accounting requirements - GPFR is not publicly accountable as there is not a large number of external users reliant on it

Large:
- Required to prepare a full, audited GPFR as large number of external uses are dependent on it

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9
Q

Reporting guidlines that must be followed by all entities

A
  1. International Financial Reporting Standards (IFRS)
    - Australian Accounting Standards (AAS): Australian modified IFRS to include specifics such as our 10% GST
  2. Corporations Act 2001: main source of company regulation and other rules overseen by the Australian Securities and Investment Commission (ASIC)
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10
Q

Reporting entities

A

An entity that has users who rely on the information in GPFR to meet their needs and thus, have to prepare a full GPFR.
- Public and large proprietary/private companies

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11
Q

Disclosing entity

A

Those entities that issue securities that are quoted on the stock market or made available to the public via a propectus and thus, must prepare additional half-year reports.
- Some public companies who have decided to list

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12
Q

Conceptual Framework

A

Guide to how to prepare GPFR, including objective, desired qualitiative characterisitcs and the definiiton and recognition criteria of elements - esstentially the underlying rules for the deveopment of accounting standards

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13
Q

Objective of GPFR

A

To provide financial info about the entity that is useful to investors, lenders and other creditors in making decisions about providing resources to the entity.

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14
Q

Information given in GPFR

A

Information concerning:
- Financial position - economic resources and caims at a point in time.
- Financial performance - the changes in economic resources and claims over a period of time.

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15
Q

Limitation of GPFR

A
  • Time lag - between when events occur and when they are reported.
  • Historical nature of the data doesn’t necessarily represent future data.
  • Costs for business to create the reports
  • Possible disadvantages the business is put in due to releasing the info e.g. competitive advantage to competitors.
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16
Q

Qualitative characterisitcs

A

The qualitites that information in the reports should possess in order to be useful.

17
Q

Fundamental qualitative characteristics

A
  • Relevance - information is relevant when it is capable of making a different to decisions made by users (ie. is has predictive or confirmatory value)
  • Faithful representation - information is complete (includes all necessary descriptions and explanaitions, includign extra info in notes), neutral (isn’t manipulated to appear in a certain way) and erorr free (no calculation error or omissions).
18
Q

Enhancing qualitiative characteristics

A
  • Comparability - info should be internally (against other periods) and externally (against other businesses comparable.
  • Understandability - info presented in a clear and concise manner using simple language and explanaition (assumes users will have reasonable knowledge fo accounting)
  • Verifiability - a range of independent and knowledgeable people could reach consensus of faithful representation (if it can’t be verified then assumptions should be disclosed)
  • Timeliness - should be available in time to be capable of influencing decisions (3 months)
19
Q

Elements of Financial Statements

A
  1. Measures of entity’s financial position:
    - Assets
    - Liabilities
    - Equity
  2. Measured of financial performance:
    - Income
    - Expenses
20
Q

Assets

A

Resource controlled by the entity as a result of past events which are expected to result in an inflow of economic benefits to the entity.
- Current assets- those that will be realised, sold or consumed within the financial year after the reporting date or are cash and cash equivalents
- Non-current assets - will last past 12 months from reporting

21
Q

Liabilities

A

A present obligation of the entity as a result of past events, the settlement of which is expected to result in a probable outflow of economic benefits.
- Current liabilites - those expected to be settled within the financial year
- Non-current liabilities will be settled after 12 months from the reporting date

22
Q

Equity

A

The assets belonging to the owners after the liabilities have been distributed to the external parties.
EQUITY = ASSETS - LIABILITIES
= CONTRIBUTED EQUITY + RETAINED EARNINGS
- Contributed equity - equity contributed by investors e.g. owners contributing cash in exchange for shares.
- Retained profits - profits earned by the business that have been reinvested in the business and not spent

23
Q

Income

A

Inflows of economic benefits (or decreases in outflows) from the entity providing a good/service/resource that results in increases in assets or decreases in liabilities that increases equty, except for contributions from equity participants.

24
Q

Expense

A

Outflows of economic benefits (or decreases in inflows) that decreases assets (or increases liabilities) that reduce owner’s equity except for distributions to equity participants (as a resource must be used).

25
Q

Profit formula

A

PROFIT = INCOME - EXPENSES

26
Q

Retained earnings formula

A

RETAINED EARNINGS = PROFIT (INCOME-EXPENSES) - DIVIDENDS

27
Q

Recognition

A

Process of incorporating an item that meets the definition of an accounting element into the reports - must be probable and hsve reliable measurement.

28
Q

What happens to the partnership if a partner dies or retires

A

It will be automatically dissolved

29
Q

The main difference between the accounting reports for the various types of business structures is in the:

A

Equity part of the balance sheet