Chapter 1 Flashcards
What is accounting?
Accounting is concerned with collecting, analysing and communicating financial information. The ultimate aim is to help those using this information to make more informed decisions.
The process of identifying, measuring and communicating information to permit informed judgements and decisions by users of the information
What is finance?
The study of how businesses raise funds and select appropriate investments to sustain their existence and create wealth. (also known as financial management).
understating finance can help identify what about the finance?
• helps identify the main forms of finance available.
• the costs and benefits of each form of finance.
• the risks associated with each form of finance.
• the role of financial markets in supplying finance.
Who are the main users of financial information relating to a business?
Get lifetime and add photo pg. 23
What are the two fundamental qualities/ characteristics that make accounting useful?
•Relevance
•Faithful representation
Accounting information should contain BOTH fundamental qualities in order to be useful.
What is relevance in relation to accounting?
The ability of accounting information to influence decisions.
To do this it should help predict future events and/ or help confirm past events.
To be relevant, accounting information must cross a threshold of materiality.
What is materiality?
An item of information is considered material, or significant, if its omission or misstatement would change the decisions that users make.
What if considered material is a matter of judgment.
And if information is NOT deemed to be material it should NOT be included in the accounting reports. (It will clutter them and interfere with the users ability to interpret them)
What is faithful representation in accounting?
The ability of information to be relied on to represent what it is meant to represent. Must reflect the substance of what has occurred.
This is regarded as a fundamental quality of useful accounting information.
When accounting is both relevant and faithfully represented what other qualities can ENHANCE its usefulness?
comparability,
verifiability,
timeliness
understandability.
What is comparability?
The quality that helps users to identify similarities and differences between items of information. It enhances the usefulness of accounting information.
What is verifiability?
The quality that provides assurance to users that the information provided faithfully represents what it is supposed to represent,
it enhances the quality of accounting information
What is timeliness?
Accounting information should be made available in time for users to make ther decisions. A lack of timeliness undermines the usefulness of the information Broadly speaking the later that an item of accounting information is produced the less useful it is.
What is understandability?
The quality that enables accounting information to be understood by those for whom the information is primarily compiled.
It enchances the usefulness of accounting information.
Suppose an item of information is capable of being provided. It is relevant to a particular decision and can be faithfully represented. It is also comparable, verifiable, timely and could be understood by the decision-maker.
Can you think of a good reason why, in practice, you might decide not to produce the information?
The reason is that you judge the cost of doing so to be greater than the potential benefit of having the information. This cost–benefit issue will limit the amount of accounting information provided.
The qualities that influence the usefulness of accounting information
Add figure 1.2 pg 31 don’t think it’s THAT deep tho idk
What are the four sequential stages of an accounting information system?
Add picture 1.3 on pg. 33
Or
• identifying and capturing relevant information (in this case financial information); recording, in a systematic way, the information collected;
• analysing and interpreting the information collected, and
• reporting the information in a manner that suits users needs.
What is management accounting?
seeks to meet the accounting needs of managers
Known as INTERNAL decision makers
What is financial accounting?
Provides economic information for EXTERNAL decision makers
Eg. • Investors
• Suppliers
Customers
• Creditors (e.g. banks)
• Government
What are the major differences between financial accounting reports and management accounting reports?
Text book pg. 38
Which one of the following is not one of the four sequential stages of an accounting information system?
a) Information analysis
b) Information recording
c) Information identification
d) Information correcting
D) information correcting
What are the qualitative characteristics of accounting that make it useful?
Qualitative characteristics can be classified into two main categories:
1. Fundamental qualitative characteristics;
2. Enhancing qualitative characteristics.
What are the three characteristics of faithful representation?
•completeness (depiction including numbers and words);
•neutrality (unbiased);
•free from significant errors (ideally).
Publicly available financial statements are produced specifically in order to satisfy the requirements of HM Revenue and Customs.
a) True
b) False
B) False
Internal users of accounting information include lenders, shareholders, brokers and managers.
a) True
b) False
B) False
Which one of the following is not one of the four sequential stages of an accounting information system?
a) Information analysis.
b) Information recording.
c) Information identification.
d) Information correcting.
D) Information Correcting
Which one of the following is a quality that, if present, will enhance the usefulness of accounting information that is already considered useful?
a) Completeness
b) Timeliness
c) Predictive value
d) Relevance
B) Timeliness
