ACCT1501 Lecture Notes - Lecture 6: Historical Cost, Financial Statement, Income Statement
ACCT1501 Kristy
Chapter 6 Financial Reporting Principles, Accounting Standards and Auditing
- GAAP: Generally Accepted Accounting Principles: rules, standards and usual practices that companies are
expected to follow when preparing financial statements
o Australian Accounting Standards Board (AASB)- jurisdiction based
o Framework for the Preparation and Presentation of Financial Statements
▪ Objectives of financial reports
• Financial position, performance, CF
▪ Assumptions underlying financial reports
• Accrual, going concern (liquidation value- how we value items in b/s)
▪ Qualitative characteristics of financial information
• Fundamental: Relevance (predictions, confirmation) + faithful representation
(complete, neutral, free from error) → Enhancing: comparability, verifiability,
timeliness, understandability
• Trade off: faithful rep vs. relevance (time) e.g ADD
▪ Definition of elements of financial statements
• b/s (position): assets (defn, recog), liabilities, equity
• income statement (performance): income (rev, gains from other), expenses (asset
outflow/depletion, incurrence of liabilities)
• statement of changes in equity
• statement of CF
• notes
▪ Recognition and measurement of those elements
• b/s valuation: historical cost (original acquisition cost (inventory)), price level
adjusted historical cost (adjusted for PP)
• current/market cost (current acquisition- input (replacement cost)/output (net
realisable) market value, fair value)
• realisable value (selling (acc rec)), present value (discounted- value in use),
liquidation value
o Accounting Guidance Releases AGB
o Urgent Issues Group statements (UIG)
o Corporations Law
o ASX listing requirements
- Accounting regulation: Fed gov: ASIC (corp act 01, regulate AUSan companies, financial markets, financial
services organisations and professionals)- consumer credit/markets/financial services regulator
o FRC (overseeing accounting and auditing standard-settling process in the private and public sector
AASB/AUASB)
▪ Helps users understand what return shareholders get on their equity (ROE) which indicates
how efficiently and effectively the organisation has used its resources + info de variability of
this return and its components helps asses fut CF
Ensuring financial reporting quality
- Corporate governance: preparation, approval, assurance
- Hierarchy of a corporation
o Agency theory: Principal and agent relationship (different interests)
- Financial reporting process
o mgmt., board, external auditors
find more resources at oneclass.com
find more resources at oneclass.com
ACCT1501 Kristy
- EXAM QU: defn of audit/key role of auditors
- Auditors should provide an independent, unbiased and professional opinion on whether the financial
statements: provide true and fair view, in accordance w Corporation Act 2001, complies w GAAP and other
professional mandatory reporting requirements
- Independence:
o Types of opinions of auditors (in annual report statement from auditors)
▪ Unmodified/unqualified opinion
▪ Qualified opinion: specified part contains material misstatement (valuation)- only one area
incorrect ‘except for’
▪ Adverse opinion: misstatements are so pervasive that statements don’t present true/fair view
(signal fraud/corruption)
▪ Disclaimer: due to limitations- inadequate evidence
- (lmao not important) Professional ethics: APES 110
o integrity, objectivity, professional competence and due care, confidentiality, professional behaviour
o threats to independence: self-interest (financial interest), self-review (audit work you’ve previously
done/design system), advocacy (promoting company), familiarity (personal/LT sympathetic- audit
partners/firms rotate periodically), intimidation
o safeguards to eliminate/reduce threats to an acceptable level are developed by: profession, legislation,
in the work environment
5-10 mark exam question w ethics
- ethics
- objectivity, professional behaviour, professional competence and due care, integrity, confidentiality
- self interest threat, self review threat
Capital markets
- the way securities are traded and security prices are established
- role of information (acct reports) in cap market
o no information based trading (liquidity trading)
o general information-based trading
o specific information-based trading
- return and risk (systematic+un risk)
- markets are ‘aggregates’ (portfolio)
- market informational efficiency: efficient market hypothesis (fair value)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Chapter 6 financial reporting principles, accounting standards and auditing. Accounting regulation: fed gov: asic (corp act 01, regulate ausan companies, financial markets, financial services organisations and professionals)- consumer credit/markets/financial services regulator: frc (overseeing accounting and auditing standard-settling process in the private and public sector. Aasb/auasb: helps users understand what return shareholders get on their equity (roe) which indicates how efficiently and effectively the organisation has used its resources + info de variability of this return and its components helps asses fut cf. Hierarchy of a corporation: agency theory: principal and agent relationship (different interests) Financial reporting process: mgmt. , board, external auditors. Exam qu: defn of audit/key role of auditors. Auditors should provide an independent, unbiased and professional opinion on whether the financial statements: provide true and fair view, in accordance w corporation act 2001, complies w gaap and other professional mandatory reporting requirements.
