ACCT1511 Exam Revision

Topics: Depreciation, Balance sheet, Generally Accepted Accounting Principles Pages: 34 (7777 words) Published: October 7, 2014
Topic 1 – Financial Reporting Principles and Accounting Standards

Accounting identifies, measures, records and communicates financial information to users – shareholders, creditors, regulators and other stakeholders via 4 financial statements. Balance sheet
Income Statement
Cash flow statement
Statement of change in equity
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of standards and procedures developed by the accounting profession that are expected to be upheld in preparation of financial statements; developed when stock market crashed in 1929 SAC 1 – Definition of Reporting: require reporting entities to be identified by reference to the existence of users who are reliant on the general purpose reporting statement for decision making and evaluation SAC 2 – Objective of General Purpose of Financial Reporting: is to provide useful information on a firm’s financial performance, position (structure, assets, liquidity) and cash flow to allow for economic decision making by users (mainly investors) SAC 3 & 4 – Replaced by Framework for Preparation and Presentation

Components of GAAP:
Framework for the Preparation and Presentation of Financial Statements (The Framework)

Provides coverage of:
Objectives of financial report
Assumptions of underlying reports
Qualitative characteristics to determine usefulness of reports – assets and liabilities Definition of elements which reports are constructed from – A, L, OE, Income, Expense Recognition and measurement of elements

Distinguishes between general purpose financial report (for most user who rely on this as main info) and special purpose financial report (list for issue of shares) Objective of financial reports - “The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions”

Accrual basis of accounting: measure of performance and position by recognising events regardless of when cash flow occurs Going Concern: Entity will operate in the foreseeable future Accounting Period: time span certain financial events took place, usually 12 months Economic entity: any organisation or unit in society can be an economic entity Monetary unit: you can only record transaction that can be expressed in term of currency; cannot record non-quantifiable items such as employee skill, quality of customer service… Historical Cost: measure of value where price of an asset on B/S is based on its original cost when acquired by the company

Understandability: information needs to be readily understandable by users; must still contain complex events Relevance: information should be relevant to the decision making needs of the users by helping them evaluate past, present or future events. Relevance of information is affected by both nature and magnitude (materiality – if omitted or misstated could influence economic decisions) Reliability: information is free from bias and material error (Completeness) and can be depended upon by users to faithfully represent economic reality Faithful representation: what actually happened

Substance over form: events are reported in accordance with economic reality, not merely laws or requirements Neutrality: freedom from bias
Prudence: caution exercised in making estimates under conditions of uncertainty; ensure A aren’t overstated and L understated – trade off with neutrality Completeness: material info is not omitted

CONFLICT: A forecast of a financial variable may possess a high degree of relevance to investors and creditors. However, a forecast necessarily contains subjectivity in the estimation of future events. Therefore, because of a low degree of reliability, generally accepted accounting principles do not require companies to provide forecasts of any financial variables.  Comparability: Users must be able to compare financial statements...
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