Week 2 Flashcards
(15 cards)
What is the concept of materiality?
Information is material if misstating it could influence decisions
What is the concept of going concern?
Proof in the statements that the company will continue into the foreseeable future (1 year)
What is an indicator/red flag that going concern is In doubt
Company extends their accounting year
What is the concept of accruals?
Transactions are recognised when they are incurred, regardless of whether the cash has been paid or received
What is the concept of consistency?
Once a firm has decided on a method for treating an accounting item, it’ll treat all similar items in the same way
What is the difference between classifying expenses by nature or function?
- Nature: depreciation, transport cost, employee bemefits
- Function: cost of distribution, admin cost
How do you account for exceptional items?
- E.g write down of assets, change in fair value, restructuring activities.
- First state how you would account for the excpetional item normally (Week 7 Seminar Q2)
- Then, disclose exceptional item on the face of the P&L a/c, presented in a separate line
- Disclose these items in notes so that they’re not included when making a decision
Why might directors have a motive to treat an item as exceptional?
To present the overall financial performance more favourably
What is included in the notes to the financial statements and why?
- Provide a breakdown of aggregated figures in the financial statement
- Why:
Enable users to understand the figures
Comparability with other companies
Provide information about risks and uncertainties
What are accounting policies?
Specific principles applied by an entity in preparing and presenting financial statements
What are accounting estimates?
Estimation that invloves judgement
How are changes in accounting policies dealt with?
- CHANGE FINANCIAL STATEMENTS RETROSPECTIVELY
- Buzz words:
RECOGNISED (i.e if expense is now being shown in P&L as an expense instead of asset)
MEASURED (fair value, historic cost v revaluation)
PRESENTED (i.e if depreciation has been charged 25% SL but now being CLASSIFIED as sales and not admin => if you change from SL to RB this is a change in estimate only BUT if you change from SL to RB and it’s classification has changed this is a change in policy as you’ve changed where you’ve presented it in the financial statements) - Adjust OB of each affected item of equity for the earliest period affected
- Present comparative amounts as if the new policy has always been applied
How are changes in accounting estimates dealt with?
- CHANGE FINANCIAL STATEMENTS PROSPECTIVELY
- Provisions for inventory write downs
- Accruals and prepayments
- The length of useful life over which to depreciate PPE => i.e straight-line or reducing balance
- Recoverability of trade receivables => bad debt (irrecoverable)
- Use new estimate DON’T restate/adjust last years figures, just use new figures going forward
How are accounting errors dealt with?
- If discovered in the current period - correct before the FS are issued
- If discovered after the FS are issued AND material in size or nature then = CHANGE FINANCIAL STATEMENTS RETROSPECTIVELY
According to IAS 8, when should a company change its policy?
- If it’s required by IFRS
- Results in the financial statements providing a reliable and more relevant information
