Chapter 7: Underlying accounting principles

Question 1

Name the six primary users of final accounts and what they use them for.

Answer 1

1. Owners - to make decisions concerning profitability of the business

2. Management - to assist in performance of duties

3. Lenders - banks decide ability to pay back loans and suppliers decide terms of credit

4. Employees - to judge a business’s ability to pay wages, future opportunities

5. Customers - to ensure business is able to provide goods

6. Government - to calculate tax liabilities, collect data

Question 2

Name and define the seven accounting principles.

Answer 2

1. Going concern - presumes that the entity will continue for the foreseeable future
2. Accruals basis - states that transactions should be accounted for in the period in which they occur, rather than when cash is received.
3. Business entity -
4. Materiality - the significance of a transaction, an item is material if it is likely to change the perception or understanding of the information (can be material by value or material by nature)
5. Consistency - transactions are treated the same way each period to allow comparisons to be made
6. Prudence - being cautious to ensure accounts aren’t over or understated
7. Money measurement - a transaction should only be recorded if it can be expressed in terms of money

Question 3

Name and define the six qualitative characteristics, and state whether they are fundamental or enhancing.

Answer 3

Fundamental

1. Relevance - capable of influencing decisions

2. Faithful representation - complete, neutral and free from error

Enhancing

3. Verifiability - provides assurance that information is credible and reliable

4. Timeliness - information provided should be within a suitable timeframe

5. Understandability - information should be understandable

6. Comparability - able to compare information over time

Question 4

Name and define the five ethical principles and give two examples for each.

Answer 4

1. Integrity - honest and truthful
E.g. not accepting praise for someone else’s work or owning up to mistakes

2. Objectivity - not being biased or allowing influences to override decisions
E.g. declining gifts or reporting any threatening behaviour

3. Professional competence and due care - working within your own ability and upholding a standard
E.g. attending training courses other than asking for help if needed

4. Confidentiality - acting with discretion
E.g. keeping documents in a locked cupboard or locking your computer when leaving the desk

5. Professional behaviour - complying with laws and regulations
E.g. complying with the law or being honest on your CV