Day 2 - Chapter 5 Flashcards

1
Q

What is the objective of financial statement?

A

to provide financial information about reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to resources to the entity

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2
Q

What are the two fundamental characteristics?

A

relevance

faithful representation

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3
Q

Relevance

A

Financial information is useful if it can assist users decision-marking by helping them evaluate past, present and future events or by confirming, or correcting their existing valuation

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4
Q

What does relevence mean?

A

info must have:

predictive value

confirmatory value

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5
Q

Predictive Value

A

helps users in assessing the future of the business

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6
Q

Confirmatory Value

A

helps users in confirming past predictions

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7
Q

When can the information of relevant be helpful in?

A

nature or materiality

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8
Q

What does the information need to be to be Faithful Representation?

A

complete

neutral - prudent

free from error

showing substance over form- transactions must be presented according to their economic substance rather than legal form - commercial reality overrides legal reality - eg leased assets

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9
Q

What is the prudent approach in accounting?

A

we recognise expenses and liability earlier than recognising income and assets

we recognise assets/income only when certain

we recognise liability/expenses when we know its a possibility

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10
Q

Enhancing Characteristics

A

nice to have

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11
Q

Examples for enhancing characteristics - qualitative

A

comparability - can compare info year on year and to other businesses

verifiability - info can be backed up by independent 3rd party

timeliness - up to date info is more useful

understandability - info must be understandable to be useful

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12
Q

What is an underlying assumption?

A

going concern - business with continue for the foreseeable future - at least 12 months from reporting date

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13
Q

Why do we follow a pro forma?

A

to provide a summary of transactions over a period of time

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14
Q

What do we do if we haven’t followed one?

A

we have to disclose it - reasons why

if we think that there is a better way to disclose - there is a true and fair override

have to estimate to financial information

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15
Q

What is comparative information?

A

we have to list last years balance along with this years

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16
Q

What is the accruals concept?

A

accruals concept requires that transactions and events have occurred are recognised when they occur and not when the business receives or pays cash

17
Q

What does the accruals concept allow for?

A

costs incurred in generating income are matched against the revenue they have generated

18
Q

What is the going concern concept?

A

continuing operations in foreseeable future

no intention or necessity to liquidate

19
Q

What does the going concern concept mean?

A

it means that assets do not need to be valued on a break-up basis - the value which they can be sold separately by the business if the business were to liquidate

20
Q

What do we need to do if the management does not think that the entity is a going concern?

A

needs to be disclosed

  • the fact itself
  • the basis on which the accounts have been prepared
  • the reasons why the entity is no longer a going concern
21
Q

What does it mean if we are accounting on a break up basis?

A

there will be no non-current assets or liabilities

may show for less than original cost

22
Q

Materiality

A

threshold of error

23
Q

What can affect materiality?

A

depends on size and effect of the item judged

24
Q

How is materiality determined?

A

its subjective

25
Q

Historial costs

A

assets are recorded at original cost

liabilities are recorded at the amount received

26
Q

If historial costs is used, assets may be understated and profit is over stated, why?

A

assets are understated therefore less dnp is charged therefore profit will be overstated due to being less expense

27
Q

Sustainability

A

do we have sustainable supply chain

minimise negative impact on climate change - are they looking to reduce carbon footprint, green house gas emissions

ethical and socital - safety of workers, compliance with laws and regulations, equality and diversity, gender pay gap

28
Q

What are the two things we need to consider in sustainability reporting?

A

impacts

dependencies

29
Q

Sustainability Reporting - impacts

A

how decisions/impacts of organisation positively affect ESG

30
Q

Sustainability Reporting - dependencies

A

how ESG issues can affect organisations ability to create and maintain value