Chapter 8 - Framework Of Acounting

Question 1

Who are the primary users of financial statements ?

Answer 1

Existing and potential investors, lenders such as banks, other creditors

Question 2

Why will existing and potential investors need the financial statements ?

Answer 2

• to see how much profit has been made
• to see how much money can be paid out in drawings or dividends
• to assess if the business will continue in the foreseeable future

Question 3

Why will lenders e.g. banks need to see the financial statements ?

Answer 3

• to see how much profit has been made
• to check that the business will be able to pay interest on loans and make loan repayments
• to assess how much of the business has been funded by the lender
• to see what security is available to cover loans

Question 4

Why would other creditors (Payables) need to see the financial statements?

Answer 4

• To decide whether to supply goods and services to the business
• to assess if the business is able to pay suppliers

Question 5

What are the four main areas the accounting framework consists of?

Answer 5

• accounting principles
• accounting policies and characteristics
• Ethical principles of accounting
• accounting standards

Question 6

What do accounting principles ensure ?

Answer 6

They ensure that the records and statements prepared are relevant and reliable to users

Question 7

Accounting principles
What does business entity refer to ?

Answer 7

This refers to the business being its own entity and not including any personal activities, assets and liabilities of the people that play a part in running the business

Question 8

Accounting principles
What does materiality refer to?

Answer 8

Some items in accounts are have such low value that is not worthwhile recording them separately so maybe group together in a sundry expenses account

Question 9

Accounting principles
What does materiality depend on ?

Answer 9

The size of the business

Question 10

Accounting principles
What does going concern presume ?

Answer 10

Going concern presumes that the business to which financial statements relate will continue to trade in the foreseeable future

Question 11

Accounting principles
What does the crural principle require ?

Answer 11

This principle requires that income and expenses are matched so they relate to the same goods & services in the same accounting period

Question 12

Accounting principles
What does the prudence principle require ?

Answer 12

The prudence principle requires that caution is exercised when making judgement under the conditions of uncertainty