Conceptual frameworks and the qualitative characteristics Flashcards
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 is Accrual Accounting?
is concerned with allocating expenses and income to the periods to which they relate.
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 , and not when the proceeds of sale are received.
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.
What is confirmatory value?
if it helps users to confirm or change their past evaluations and assessments. Information may have both predictive and confirmatory value.
What is materiality?
Materiality provides guidance as to how a transaction or item of information should be classified in financial statements and/or whether it should be disclosed separately rather than being addded totally with other similar items.
What area do materiality affect?
- presentation of financial information
- application of accounting standards
What does materiality provide?
It provides a threshold or cut off point rather than being a primary qualitative characteristic which information must have if it is to be useful.
