The Regulatory Framework Of Accounting

Question 1

What is the regulatory framework of accounting?

Answer 1

As the framework forms the ‘rules’ of accounting. Accountants seek to follow the same set of ‘rules’, thus enabling broad comparisons to be made between the financial result of different companies.

Question 2

What three things is the regulatory framework of accounting made up of?

Answer 2

1. The accounting standards - set by the IASB (IAS and IFRS)
2. Company Law (Companies Act)
3. The conceptual framework

Question 3

What does following the three things of the regulatory framework lead to?

Answer 3

GAAP (generally accepted accounting principles)

Question 4

What is the objective of the financial reporting as per the conceptual framework?

Answer 4

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Question 5

What are the three things that the conceptual framework is/does?

Answer 5

1. Concepts for preparation and presentation of financial statements
2. Development of IFRS’s
3. Deals with objective of financial reporting.

Question 6

What are the two things that the conceptual framework is not/does not do?

Answer 6

1. It is not an accounting standard

2. It is not so much a rule that can be broken, but lays out the ‘Ethos’ that accounting statements should be built upon

Question 7

What are the two bases that are used when preparing financial statements?

Answer 7

1. Going Concern

2. Accruals Basis

Question 8

What is meant by going concern in relation to the conceptual framework?

Answer 8

Financial statements are prepared assuming that the business will continue in the forseeable future.

Question 9

What is the basis called when the financial statements are prepared when the business is not going to continue is the foreseeable future?

Answer 9

Break up basis

Question 10

What is meant by accrual accounting in relation to the conceptual framework?

Answer 10

Means that financial statements are prepared on the assumption that transactions are recorded/recognised when they occur and not when the cash is received or paid. Using accrual accounting means revenues + costs are entered into the accounting period.

Question 11

What are the two fundamental qualitative characteristics?

Answer 11

Relevance

Faithful representation

Question 12

What are the four enchancing qualitative characteristics?

Answer 12

Comparability
Verifiability
Timeliness
Understandability.

Question 13

What three things make up relevance?

Answer 13

1. Capable of making a difference in the decisions made by a user.
2. Have predicted value, which helps user to predict future outcomes
3. Have confirmatory value, which helps user to confirm previous evalutations

Question 14

What two things make up faithful representation?

Answer 14

1. Correspond to the effects of transactions + events

2. As far as possible be complete, neutral and free from error

Question 15

What does comparability mean?

Answer 15

Enables users to identify and understand similarities and differences for several years of an entity’s trading or between different companies.

Question 16

What does verifiability mean?

Answer 16

Helps assure users that information is faithfully represented. Can be direct (counting cash, stock take etc) or indirect (application of inventory value using a specific method (LIFO, FIFO etc))

Question 17

What does understandability mean?

Answer 17

Means that information is classified, characterised and presented clearly and concisely. (Bear in mind that financial statements are presented on the basis that users and their advisors have a reasonable knowledge of business and economic activity)

Question 18

What does timeliness mean?

Answer 18

Means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older information is, the less useful it is

Question 19

What two things mean materiality?

Answer 19

1. Information is material if its omission or mis-statement would influence the economic decisions that users make based on the financial information about a specific reporting entity.
2. Materiality is an entity-specific aspect of relevance, based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.