Chp 3: Conceptual Frameworks And The Qualitative Characteristics Of Financial Information Flashcards
What is accrual accounting?
- Is concerned with allocating expenses and income to the periods to which they relate.
- This means expenses are matched to the period they were used by the reporting entity and the income to the period it was earned, as distinctly different to when cash is paid out for expenses and when cash is received from a sale.
What is revenue recognition?
It relates to the assumption that a sale is deemed to have taken place at the time at which the goods are delivered or services provided (I.e when the revenue is earned) , and not when the proceeds of sale are received.
What is an opening deferred income?
- Cash received in advance in an earlier period but which relates to this period.
- For example, a deposit received in the previous period when ordering a product that will not be ready for sale until the current period.
What is an opening prepayment?
- Monies paid in advance for an expense that relates to this period.
- For example, paying six months’ rent in advance three month before the year end.
- Three months will relate to the previous year and three months (half the payment) will be treated as a prepayment ( an asset) and carried forward and expensed in the current year.
What is a closing trade payables and accruals?
- Goods received this year (trade payables) and expenses incurred such as electricity or gas (accruals) but not paid for until the next year should be brought into the financial statements in the current year as expenditure and a liability
What is closing trade receivables
- Goods sold this year but monies not received until the next year should be brought into the financial statements in the current year as income.
Who are primary users of financial reporting?
- existing and potential investors
- lenders
- other creditors
Why are investors interested in financial reports?
they are providers of risk capital. They are concerned with evaluating the risk in, and return provided by their investment.
Why are lenders interested in financial reports?
Lenders are interested information that enables them to determine whether their loans, and the interest attached to them, will be paid when due.
Why are other creditors interested in financial reports?
Other creditors include suppliers. They have similar interests to lenders. When a supplier provides hoods in advance of receiving payment, this like giving a loan. Therefore, they are primarily interested in deciding whether to trade with the reporting entity or not.
How does financial reporting meet the needs of the primary users?
- to assist users when assessing an entity’s financial strengths and weaknesses
- to assess the entity’s liquidity and solvency
- to assess entity’s need and ability to obtain financing.
What two principles of qualitative characteristics that make information useful in accounting?
relevance and faithful representation.
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?
if it can be used to help users to evaluate or assess past, present or future events. To have predictive value, information need not be in the form of an explicit forecast or prediction.
