More on Concepts Flashcards
What are the implications of a firm no longer going concern?
- Banks may refuse to lend them funds.
- Landlords may enforce break clauses in rented land
- Suppliers may withdraw credit facilities. (Time to pay)
What impact does the going concern concept have on the value of assets?
Assets are valued on their value in use. This tends to be significantly more than the current cost of the asset.
What is the net realisable value?
When selling assets, they should be written down as the expected value to be received minus the cost of sales.
What are the 4 main types of accrual transaction?
Deferred income
Prepayables
Trade receivables
Trade payables
What is deferred income?
Income received that has not yet been earned.
What are prepayments?
Money spent in advance for goods that haven’t been received yet.
What are trade payables?
Goods received that have not yet been paid for.
What are trade receivables?
Goods sold but money not yet received.
What is the point of the prudence concept?
To give users confidence that financial statements are accurate in that no profits are included that haven’t been earned and assets/liabilities haven’t been over/understated.
What is the point of the matching concept?
Presents a more accurate picture of a company’s operations. Allows for a smoother income statement where revenues and expenses are tied together.
What is the point of the consistency concept?
If accounting policies, estimation techniques and measurement bases were allowed to change year to year, it would make comparisons meaningless.
