Accounting Characteristics/Assumptions

Question 1

Timeliness

Answer 1

Having info avail. to decision-makers in time to influence decs
Sooner than later = enhances cap to inf dec
Generally, older = less useful

Question 2

Understandability

Answer 2

Fin info should be comprehensible to users w/ rsbl knowledge of bus/eco activities
Presented clearly + concisely

Question 3

Relevance

Answer 3

Capable of making a diff to dec made by users
Info should be related to economic dec
Rel if it helps users to form predictions about outcomes of past/pres/fut events and/or confirms or changes prev eval by providing suitable feedback

Question 4

Faithful representation

Answer 4

Info reported must be faithful rep of eco event it represents
Info is complete, free from material error and without bias

Question 5

Comparability

Answer 5

Enables users to ident and understand sim/diff among items
Info about entity is more useful if comparable w/ similar info from other entities and same entity for another period/date

Question 6

Verifiability

Answer 6

Ability to ensure that diff knowledgable and indep observers can reach a consensus that a particular depiction of an event is faithfully represented.
Maintained thru retention of src docs
Holds acc prof accountable for their work

Question 7

Period assumption

Answer 7

Reports are prepared for a period of time for comparability of results
Recognising rev earned and deducting expenses incurred for a period allow for profit determination
Distinction can be made between assets, which will provide benefit to future periods, and expenses that are totally consumed within one period

Question 8

Accrual basis assumption

Answer 8

Rev recognised when it is earned, expenses recognised when they are incurred.
Accrual basis profit for a period -> subtracting expenses from revenue earned in that same period.

Question 9

Going concern assumption

Answer 9

Reports prepared on the assumption that entity will continue to operate into the future
Assumed that the entity will not be wound up in the near future but will continue its activities.

Question 10

Entity assumption

Answer 10

Records of A, L and business activities of the entity kept completely separate from owner’s and from those of other entities
Separate set of records is maintained for each entity, which provide information on that entity only

Question 11

Asset

Answer 11

A present economic resource controlled by the entity, as a result of past events, that has a potential to produce economic benefits

Question 12

Liability

Answer 12

A present obligation of the entity, to transfer an economic resource, as a result of past events

Question 13

Owner’s equity

Answer 13

The residual interest in the assets of the entity after deducting all its liabilities

Question 14

Revenues

Answer 14

Increases in assets or decreases in liabilities, that result in increases in owner’s equity, other than those relating to contributions from the owner.

Question 15

Expense

Answer 15

Decreases in assets or increases in liabilities, that result in a decrease in owner’s equity, other than those relating to distributions to the owner

Question 16

Describe an allowance for doubtful debts with respect to an accounting element

Answer 16

Definition of an asset, then reverse it and show how it satisfies this
i.e. -> “An allowance for doubtful accounts is considered a negative asset, because it reduces the amount of an asset, in this case the accounts receivable.”

Question 17

PROCESS: When a check is given after bankruptcy

Answer 17

Take full amount owing (incl. GST) and subtract all money received
Then split amount remaining into Allowance and GST clearing credits

Question 18

PROCESS: Disposal of a non-current asset

Answer 18

1. Move asset orig cost to Disposal acc
2. Move acc dep’n of asset to Disposal acc
3. Recognise cash/trade in received with a credit to Disposal acc
4. Rebalance the Disposal acc w/ a debit (profit) or credit (loss) as required
5. [in case of trade in] Report loan amount (calculated by cost incl GST less trade-in val) then payment for remainder

Question 19

Explain your treatment of the unearned sales with reference to an accounting element

Answer 19

This is a current liability, as Helen’s Hats has a present obligation to provide goods to their customer, Sandy Sports, since they received money for their future provision of goods but have not supplied these goods yet (1 mark)

This results from the past event of receiving the order from Sandy Sports [receipt/eft xxx] (1 mark)

She will transfer an eco resource, being inventory to Sandy Sports (1 mark)

Question 20

Question -> relating to the closure of rev/exp accounts

Answer 20

Looking for “to determine profit” and “to return accounts to zero”

Question 21

Question -> relating to the treatment of a product cost (i.e. for a van’s spray paint)

Answer 21

(for two marks) To get it into a rev-earning cap. and that it is expected to provide future eco benefit over the life of the asset

Question 22

Explain the effect on the income statement if xyz used the reducing balance method of dep’n as opposed to the straight line method

Answer 22

If Dufficy’s Desks used the reducing balance method instead of the straight method of depreciation the profit would be lower [1 mark] as depreciation expense for the period ended 30 June 2020 would be higher [1 mark]. This is because under the straight-line method the depreciation expense would be $7 550 [1 mark] as opposed to using the reducing balance method depreciation expense would be $11 200for the year ended 30 June 2020 [1 mark].

Question 23

When is an accrued expense reported in the business’ reports?

Answer 23

When an expense has occurred during the period but there are still outstanding accounts on balance day
Its purpose is to recognise the expense while also recognising the business’ liability for the near future in the balance sheet