Topic 2 - Regulation Flashcards
What is the purpose of accounting?
To provide financial information for decision making.
What is accounting?
The process of identifying, measuring, recording and communicating the economic transactions and events of a business operation.
What is the accounting process?
- Identifying: taking into consideration all transactions which affect a business entity
- Measuring: quantifying in monetary terms
- Recording: analysing, recording, classifying and summarising transactions
- Communicating - preparing accounting reports, analysing and interpreting
What are the roles of accountants?
- Commercial accountants
- Public accountants
- Government accountants
- Not-for-profit accountants
What is the conceptual framework?
Consists of a set of concepts to be followed by preparers of financial statements and standard setters.
What is the purpose of financial reporting?
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
Financial reporting allows users to evaluate and predict the entity’s what?
- ability to generate cash in the future
- future borrowing needs and how future profits and cash flows will be distributed among those with an interest in the entity
- likely success in raising further finance and meeting commitments when they fall due
- Investing, financing and operating activities.
What are the elements of the four main financial statements?
Revenues, Expenses, Assets, Liabilities and Equity
Explain the two accounting concepts.
- Accounting Period Concept: The life of a business entity can be divided into artificial periods
- Accounting Entity Concept: Owner’s transactions are separate from entity’s transactions
Explain the four accounting principles.
- Monetary Principle: Items included in accounting records must be able to be expressed in monetary terms (e.g. $)
- Cost Principle: All assets are initially recorded in the accounts at their purchase price or cost
- Full Disclosure Principle: all circumstances and events that could make a difference to decision-making process should be disclosed in the financial statements.
- Going Concern Principle: business will remain in operation for the foreseeable future.
Explain the two fundamental qualitative characteristics.
- Relevance: Accounting information is relevant if it makes a difference in a decision. Affected by materiality (i.e. likely to influence decision making)
- Faithful Representation: Accounting information must reflect the actual events and transaction being represented. Users can trust or depend on the information presented in financial statements.
Explain the accounting constraints.
- Timeliness: information may be irrelevant if there is a long delay in reporting
- Cost: cost versus benefit of providing it
What are the four conceptual framework sections?
- Objective of general purpose financial reports
- The reporting entity
- Definition of elements of financial statements
- Concepts, principles and qualitative characteristics
Who are the primary users of general purpose financial reports?
Equity investors (contribute resources e.g. cash) and lenders (contribute resources e.g. banks)
What does the Statement of Profit or Loss report on?
Reports revenues less expenses for a particular period of time
