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Financial Accounting > The Qualitative Characteristics of Financial Information > Flashcards

The Qualitative Characteristics of Financial Information Flashcards

1
Q

Conceptual Framework for Financial Reporting

A
  • IFRS are based on these
  • addresses underlying concepts
  • assist to develop the standards
  • assist when no standard applies/allows a choice
  • assist for all standards to be understood/interpreted
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2
Q

Chapter 1 of Conceptual Framework

A

The objective of general purpose financial reporting

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3
Q

Chapter 2 of Conceptual Framework

A

Qualitative characteristics of useful financial info

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4
Q

Chapter 3 of Conceptual Framework

A

Financial Statements and the reporting entity

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5
Q

Chapter 4 of Conceptual Framework

A

The elements of the financial statements

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6
Q

One important assumption that Conceptual Framework sets out

A

Financial Statements prepared on the assumption that entity is a Going Concern

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7
Q

Going Concern

A
  • entity will continue in operation for foreseeable future (12 months)
  • has no intention/need to enter into liquidation/cease trading
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8
Q

What should happen if the going concern basis is not followed/true?

A
  • statement must state why not a going concern
  • prepared differently and describe basis used (break up value of assets)
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9
Q

Accrual Accounting

A

-effects of transaction/events are recognised when they occur and so recorded in that period that they relate to
- not recorded when cash received or paid but as revenue/expenses earned/incurred
- not an underlying assumption but in Conceptual Framework

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10
Q

Matching Convention

A
  • revenue earned must be matched against expenditure incurred in earning it
  • sales matches with cost of sale
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11
Q

net realisable value

A
  • likely eventual sales price less any expenses incurred to make them saleable
  • how assets recorded if at break-up value if not a going concern
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12
Q

Qualitative characteristics of financial info

A

attributes that make info in statement useful to users

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13
Q

Fundamental Qualitative Characteristics

A

Relevance
Faithful Representation

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14
Q

Enhancing Qualitative Characteristics

A

Comparability
Verifiability
Timeliness
Understandability

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15
Q

Relevance

A
  • info is capable of making a difference in decisions made by users
  • may have predictive value - future
  • may have confirmatory value- confirm past
  • the above are often interrelated
  • affected by nature/materiality
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16
Q

Materiality

A
  • material if omitting/misstating could influence decisions
  • immaterial = too trivial to affect understanding
  • important so that time/money not wasted open excessive detail
  • context is important
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17
Q

Aggregation

A
  • adding together/lumping of assets/liabilities/equity/income or expenses that have shared characteristics and included in same classification
    e.g. sales as one figure not list of transactions
  • often summarised info and more detail in notes
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18
Q

Offsetting

A
  • when asset and liability recognised/measured as separate unit of account but groups them into single net amount
  • generally not appropriate as results in dissimilar items classified together
19
Q

Faithful Representation

A
  • reports represent economic phenomena in words/numbers
  • info must be complete, neutral, free from error
20
Q

Complete depiction

A
  • all info necessary
  • for user to understand phenomenon depicted
  • include all necessary descriptions/explanations
21
Q

Neutral depiction

A
  • without bias
  • not slanted/weighed/emphasised/de-emphasised/otherwise manipulated
  • to be received favourably/unfavourably
  • supported by prudence
22
Q

Prudence

A
  • exercise of caution when making judgements
  • assets/income not overstated
    liabilities/expenses not understated
23
Q

Free from Error

A
  • no errors/omissions in description of phenomenon
  • process used to produce reports have no errors
  • free from material error
24
Q

Substance over Form

A
  • characteristic of faithful representation
  • commercial reality take precedent over legal form
  • examples:
  • sale with a right of return - not recognise sale until sure that it is a genuine sale
  • Consignment arrangements- once entity has control over asset then record as asset
25
Q

Comparability

A
  • enable users to identify/understand similarities/differences
  • info more useful if it can be compared
  • entities must disclose their accounting policies
  • over different periods/entities
26
Q

Verifiability

A
  • assure users that info faithfully represented
  • info can be independently verified and all reach consensus
    direct = counting cash
    indirect = checking inputs/outputs
27
Q

Timeliness

A
  • info available to decision makers in time to be capable of influencing decisions
  • has to be a balance between timeliness vs reliable info
  • overriding consideration is best way to satisfy decision making
28
Q

Understandability

A
  • classifying, characterising, presenting info clearly/concisely makes it understandable
  • assume users have reasonable knowledge
    one line for revenue and then further detail may be provided
  • can’t exclude info just to make easier to understand as then would be incomplete
29
Q

Consistency

A
  • presentation/classification of items in statement should stay the same from one period to the next
    UNLESS
  • change in operation
  • a review/feedback
  • required by IFRS
30
Q

Business Entity

A
  • financial statements always treat business as separate entity from owner
  • applies whether or not business is separate in law
31
Q

Equity = Net Assets
(breakdown of this equation)

A

Assets - Liabilities = share capital + reserves

32
Q

Revenue

A

income that arises in course of ordinary activities of entity

33
Q

Gains

A

other items meeting definition of income

34
Q

Duality

A
  • double entry bookkeeping
  • financial transactions have two affects on general ledger accounts
35
Q

What are the two measurement bases? and how to choose?

A
  • historical cost
  • current value
  • choice depends on what info primary users of statements require/useful
36
Q

Historical Cost

A
  • for asset - cost that was incurred when acquired
  • for liability - value of the consideration received when incurred
  • traditional
  • can be modified by revaluation in some instances for certain assets (buildings)
  • reliable info
37
Q

Adv.s of using historical costs

A
  • objective as not so easy to manipulate
  • reliable as can be verifiable, exist on documents
  • statements of financial position/cash flows consistent
  • readily understood
38
Q

Current Value and bases

A
  • uses updated info to reflect conditions at measurement date
  • fair value
    -Value in Use/Fulfilment Value
  • Current Cost
    -relevant info
39
Q

Fair Value

A
  • price would be received to sell an asset/paid to transfer liability
  • in orderly transaction on open market
  • at measurement date
  • when no active market can use estimates of future cash flows/time value of money
40
Q

Value in use

A
  • present value of the cash flows that an entity expects to derive from use/disposal of an asset
  • can’t be directly observed
  • looks at likely future value
  • entity-specific
41
Q

Fulfilment Value

A
  • present value of cash that entity expects to be obliged to transfer as it fulfils a liability
  • entity expects to incur to fulfil a liability
  • can’t be directly observed
  • entity-specific
42
Q

Current Cost for Assets

A
  • cost of equivalent asset at the measurements date comprised of consideration that would be paid plus transaction costs
43
Q

Current Cost for Liabilities

A
  • consideration that would be received for an equivalent liability at measurement date minus transaction costs incurred
44
Q

Adv.s of Current value

A
  • useful guide for management to decide on hold/sell assets/settle liabilities as uses expected benefits
  • relevant to needs of users- stability/vulnerability of business
  • evaluate performance of management
  • judge future prospects

Financial Accounting (12 decks)

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