Introduction Flashcards
define accounting
past events are summarized into numerical information which is then presented to managers and other interested parties for decision making and control purposes
what does “past events are summarised” in the definition of accounting mena
gathering data and summarised what happened in the past and predict what will happen in the future
what does the “numerical information” mean in the definition of accounting
eg currency, results, averages
function of accounting
control outcomes and activities to enable you to account for actions and your use of resources to achieve accountability to those who entrusted you with resources and power
examples of decisions made using accounting information
production levels product/service cost selling prices staff needed to meet budgeted sales target staffing costs and income generated financing expenses
what is revenue
money from all sales made
what are the qualities expected of accounting information
relevance faithful representation comparability verifiability timeliness understandability materiality
what is meant by the relevance quality
financial information must be relevant to users’ decision making needs ie no irrelevant information
in relation to relevance, how do you tell if the information is relevant
if it has predictive value and it has confirmatory value
only material information should be used
what is confirmatory value
the previous predictions have been correct
who decides what material information is relevant
company
what is meant by the faithful representation quality
the information is: complete neutral and un biased free from error reliable
what does free from error mean in faithful representation
accounts don’t have to be 100% accurate but estimates can sometimes be made eg on utilities (heat, lighting) and then can be adjusted later for accuracy including a note in the financial statement
what is meant by the comparibilty quality
information should be comparable over time so accounts should be prepared the same every year
why is comparability important
similarities and differences are readily apparent
eg between competitors
how can comparability be improved
through consistency i.e. using the same accounting treatments for the same types of item, from period to period
what does IFRS stand for
international financial reporting standards
what is meant by the verifiability quality
independent, knowledgeable observers agree that the information is of faithful representation eg auditors
what does the job of an auditor include
checking that financial statements are correct
examples of the big 5 auditors
Earnest and Young (EY) Grant Thornton Deloitte PwC KPMG
what is meant by the timeliness quality
information should be available to users in time for it to be capable of influencing decisions
if left too long, the usefulness of information declines
what does a plc stand for
public limited company
what is an independence note
note signed by auditor to confirm independence
what type of companies don’t have to produce annual reports at the end of each year
ltd
what is meant by the understandability quality
that the information is understood by those at who it is aimed
why does understandability not mean simplicity and excluding complex infromation
because excluding this complex information means that the information will not be faithfully represented or complete
what is assumed of financial report users
reasonable knowledge of business and economic activities so they can make sense of the reports
what is meant by the materiality quality
if it could influence decisions it must be reported and if information would not influence decisions it should be omitted as it could cause clutter and interfere with users’ ability to make decision
what is IASB
international accounting standards board
what is the cost/benefit of financial reporting
it is expensive and timely to collect, process and verify financial information but the benefits of providing it outwieght the costs of obtaining it
who are the main users of financial reports and information
investors customers suppliers lenders government competitors the public employees management
why are investors interested in using financial reports
as they are interested in buying shares/ownership if they are potential investors and buying more or selling theirs if they are existing investors
why are customers interested in using financial reports
should they continue to use this company, will the entity survive
why are suppliers interested in using financial reports
will they be paid in the future
if the company expands, will they have the capabilities to expand with them
why are lenders interested in using financial reports
want to know if they will be repaid +interest
why are governments interested in using financial reports
want to get taxes
the company contributes to society
why are competitors interested in using financial reports
want to know best how to compete or maybe they should leave the market
to benchmark thwir own performance
why are the public interested in using financial reports
want to know will this company still continue to provide jobs and contribute to society
why are employees interested in using financial reports
want to know how stable the company is and how secure their job is
maybe they’ll want to demand more reward for their work if the company is doing particularly well
why are management interested in using financial reports
to analyse and make decisions
why might conflict exists between user of the financial report
eg lenders and owners may have conflict because funds lended may not have been spent on what was agreed
what is management accounting
accounting that seeks the needs of managers decision making
what is financial accounting
accounting that meets the need to a variety of user
what are the main differences between management accounting and financial accounting
nature of reports level of detail regulations reporting interval time orientation range and quality of information
how do levels of detail differ between financial and management accounting
financial = broad view as used for a wide variety of purposes
management = more detail into decision making
how do regulations differ between financial and management accounting
management reports are for internal use only so are only designed for the need of the individual manager/situation
financial reports must follow a specific content and format standards under IASB and IFRS
how do reporting intervals differ between financial and management accounting
financial must be made either annually or sometimes biannually
there are no required reporting intervals for management accounting as they are made as required
how does time orientation differ between financial and management accounting
financial accounting is backward looking, analysing past events and predicting based on that
management accountign looks at both past and present performance
how does the range of information differ between financial and management accounting
financial accounting has objective info with verifiable information
management can be more subjective and include information of non financial information such as sales orders, new product launches etc
