Module 4, Chapter 12 - Financial Accounting and Management Flashcards
What is the purpose of financial reporting?
Financial reporting is required for an entity to keep itself accountable and inform interested parties (stakeholders) of
its financial performance. This enables stakeholders to make decisions about the business.
What is the main way of providing financial information to company stakeholders?
Financial statements or accounts. These are produced annually to a format approved by the government of the jurisdiction
the entity operates in and form a summary of both the entity’s performance over the year and its financial position
at the end of that year.
There are two systems of financial reporting that entities must adhere to in the UK. Name them.
- UK GAAP
- IFRS
What does IFRS stand for?
International Financial Reporting Standards
Define IFRS (International Financial Reporting Standards).
IFRS (International Financial Reporting Standards) is a set of internationally-agreed financial reporting and
accounting standards that any type of entity can use. UK listed groups must report using IFRS.
What does UK GAAP stand for?
Generally Accepted Accounting Practice
In a UK GAAP (Generally Accepted Accounting Practice) report, the level of reporting required depends upon what?
With UK GAAP (Generally Accepted Accounting Practice), entities are split into micro, small, medium and large
based on their turnover, net assets and number of employees. The level of reporting required varies based on which
of these the entity falls under.
What are the fundamental qualitative characteristics of useful financial information?
Relevance and faithful representation
What are the enhancing qualitative characteristics of useful financial information?
- Comparability
- Verifiability
- Timeliness
- Understandability
What is meant by materiality?
Information is said to be material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions taken by users of financial statements
What does ‘faithful representation’ mean?
Faithful representation means financial reports must represent economic events and transactions in a way
that aims to be: complete; neutral and free from error.
What is meant by ‘comparability’?
Comparability refers to how well the information in a financial statement can be compared to previous periods
for the same entity or to information about another entity.
What is meant by ‘verifiability’?
Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
What is meant by ‘timeliness’?
Timeliness means having information available to decision-makers in time to be capable of influencing their decisions.
How should information be displayed in order to make it understandable?
Classifying, characterising and presenting information clearly and concisely makes it understandable.
Before computers, how did companies record their financial data?
In ledgers and books of prime entry using the double-entry bookkeeping process. These records were filled out by hand.
In the modern day, how do companies record their financial data?
Nowadays, books of record are entered into accounting software rather than filled out by hand.
What is the equation for accounting?
Assets = Liabilities + Capital