Chapter 1 - Accounting and Ethical Principles Flashcards
Who are the primary users of financial statements, and why do they require their use?
Investors - to find out if they will receive return on capital introduced to the business
Lenders - to ensure the business is well-financed and can afford any loan repayments
Creditors - will they be paid for the goods supplied to the business?
What are the key accounting principles?
- Going Concern
- Accruals Principle
- Business Entity Principle
- Materiality
- Consistency
- Prudence
- Money Measurement
What is Going-Concern?
The assumption that the entity will continue to operate for the foreseeable future.
What is the Accruals Principle?
This ensures that transactions are recognised when they occur, not when the cash is received or paid.
What is the Business Entity Principle?
A business is a separate entity from its owners, and the transactions of a business must be recorded separately from the transactions of its owners.
What is the Materiality Principle?
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions made by the primary users.
What is the Consistency Principle?
The use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.
What is the Prudence Principle?
The exercise of caution when making judgements.
What is the Money Measurement Principle?
A transaction should only be included in the final accounts if it can be measured in monetary terms.
What are the fundamental qualitative characteristics of useful financial information?
Relevance and Faithful Representation
What is Relevance?
Information is relevant if it is capable of making a difference in decisions.
What is Faithful Representation?
Information faithfully represents if it is complete, neutral, and free from error.
What are the Enhancing Qualitative Characteristics?
- Comparability
- Timeliness
- Verifiability
- Understandability
What are the five fundamental ethical principles?
- Integrity
- Objectivity
- Professional Competence and Due Care
- Confidentiality
- Professional Behaviour
What is Integrity?
Straightforward, honest, implies fair dealing and truthfulness.
What is Objectivity?
Uncompromised by bias, conflict of interest or the undue influence of others.
What is Professional Competence and Due Care?
Maintain professional knowledge and skill and act diligently.
What is Confidentiality?
Refrain from disclosure of confidential information, and from using such information for personal (or third party) advantage.
What is Professional Behaviour?
Comply with relevant laws and regulations, and avoid any action that may bring the profession into disrepute.
What are the threats to the fundamental ethical principles?
- Self Interest
- Self-Review
- Advocacy
- Familiarity
- Intimidation
What is the Self-Interest threat?
If the accountant has personal financial interest, incentive compensation arrangements or undue dependence on fees.
What is the Self-Review threat?
Data being reviewed by the same person responsible for preparing it.
What is the Advocacy threat?
Represent an assurance client in litigation or disputes with third parties.
What is the Familiarity threat?
Former partner of the firm being a director or officer of the client.
