Chapter 4&5 Flashcards
What is Relevance?
Information is relevant if it can influence user decision-making. To be relevant, information typically has:
- Predictive Value
- Confirmatory Value or
- both
What is faithful Representation?
information should represent a phenomenon faithfully. This means the information should be:
-complete
- neutral
- free from error
What is predictive value?
– Predictive value: when the information can help users to evaluate or assess past, present or future events.
* Comparatives help predictive value
* Separation of exceptional, one-off and abnormal items helps relevance.
* Separation of information on newly acquired/disposed of businesses aids relevance
What is confirmatory value?
– Confirmatory value: when the information helps users confirm or change their past evaluations and assessments
What is materiality?
- Relevance is affected by the nature of information and its materiality.
- Information is material if its omission or misstatement could influence decisions that users make on the basis of financial information about a specific reporting entity.
- Materiality affects the presentation of financial information and the application of accounting standards.
How to Determine materiality levels?
- Professional judgement
- Depends on the nature or magnitude, or both, of the items – in the context of the individual entity’s specific financial report.
- Materiality provides a threshold or cut-off point – hence it is not a primary qualitative characteristic of useful information.
What is completeness?
- To represent faithfully what it purports to represent, there is an implication that the information contained in financial statements is complete. This includes providing information on the nature of the item.
- Information that has been omitted for reasons other than materiality can cause the financial statements to be false or misleading and thus unreliable and deficient in terms of
their relevance
What is Neutrality?
- The information provided by financial statements needs to be neutral - in other words, free from deliberate or systematic bias.
- Financial information is not neutral if it has been selected or presented in such a way as to influence the making of a decision or judgement in order to achieve a predetermined result or outcome.
- Neutrality is supported by prudence. This ensures that assets, liabilities, income and expenditure is not understated or overstated.
What is Free from material error?
- When there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no error in the process (CF, IASB, 2018)
- Information that contains a material error can cause the financial statements to be false or misleading and thus unreliable and deficient in terms of their relevance.
What is comparability?
enables users to identify and understand similarities in and differences among items. Comparability is aided by:
- Consistency in the treatment of items within an entity and across entities
- Accounting standards
What is verifiability?
Information should be capable of verification by different knowledgeable and independent observers. Verification can be:
- Direct - by direct observations such as counting cash
- Indirect - by checking inputs to a model (disclosed assumptions), the model formula (methods used) and recalculating the output using the same methodology
What is timeliness?
providing information in sufficient time to decision-makers to influence their economic decision- making.
What is understandability?
is assisted when information is characterized and presented clearly and concisely. It is assumed that users have a reasonable knowledge of business and economic activities and that they review and analyse the information diligently
Equation for Assets?
Assets = Capital + Liabilities
Equation for Capital?
Assets – Liabilities = Capital
What does Net resources
of the business equal?
Owners interest in the business
what is an asset?
An asset is a tangible or intangible resource that is owned or controlled by an accounting entity, and which is expected to generate future economic benefits (e.g. plant & machinery, office equipment, inventories, trade receivables, cash).
What is a liability?
A liability is a legal obligation to transfer assets or provide services to another entity which arises from some past transaction or event
(e.g. loans, trade payables).
What is capital?
Capital is the difference between an entity’s assets and liabilities
What is a dynamic/transaction based approach?
a dynamic/transaction based approach that involves the matching of sales revenue with revenue expenditure to determine profit for the year. Thus profit = sales revenue - cost of goods sold;
What is a comparative static/capital maintenance based approach?
a comparative static/capital maintenance based approach in which profit = capital at the end of the period – capital at the start of the period (- capital introduced + drawings).
What is revenue expenditure?
Revenue expenditures are short-term business expenses usually used immediately or within one year. They include all the expenses that are required to meet the current operational costs of the business, making them essentially the same as operating expenses
What is capital expenditure?
- Capital expenditure - amounts which it is appropriate to carry forward as part of the next year’s opening statement of financial position.
- Capital expenditure is carried forward because it will be used over a number of periods and contributes to several periods’
revenues. - Capital expenditure includes the cost of purchasing a noncurrent asset (including the costs of getting the non-current asset operational at the outset) and the cost of improvements to a non-current asset that lead increased revenue, or sustained revenue.
