ACCT1501 Lecture Notes - Lecture 9: Accrual, Going Concern, Historical Cost
18 May 2018
School
Department
Course
Professor
Friday, 3 March 2017
Accounting & Financial Management 1A
Financial Reporting Principles, Accounting Standards & Auditing
-Generally Accepted Accounting Principles (GAAP):
•Rules, standards & usual practices that companies are expected to follow when
preparing financial statements
•Components:
-Accounting standards - Australian Accounting Standards Board (AASB)
-Framework for the preparation & presentation of financial statements - The
Framework
-AAG: Accounting Guidance Releases
-UIG: Urgent Issues Group Statements
-Corporations Law
-ASX Listing Requirements
•The Framework: Sets out concepts that underlie preparation of financial reports for
external users
A. Objective of Financial Reports
•Provide information about (i) financial position - balance sheet, (ii) financial
performance - income statement & (iii) cash flows - cash flow statement
B. Underlying Assumptions
•Accrual basis - recognising economic events regardless of cash transactions
-Revenues & expenses reflected in accounts in period to which they relate
•Going concern - entity will continue in operation into foreseeable future
-If not, financial reports prepares on basis other than historical cost (ie
liquidation value)
•Accounting entity, accounting period & monetary assumptions
C. Qualitative Characteristics
•Relevance - information should assist users to make, confirm or correct
predictions about outcomes of past, present or future events
-Making & evaluating decisions about allocation of scarce resources
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Friday, 3 March 2017
•Prediction - can be used by users in making their own prediction
•Confirmation - provides feedback about previous evaluations
-Affected by both nature & magnitude (materiality) of information
•Faithful Representation - of that which it purports to portray
-Information needs to be:
•Complete - includes all information necessary for user to understand
phenomenon being depicted
•Neutral - without bias
•Free from error - no errors or omissions in description of phenomenon
•Enhancing Qualitative Characteristics
-Comparability - to similar info about other entities & with similar info about
same entity for another period or date
-Verifiability - different knowledgeable & independent observers could reach
consensus, although not necessarily complete agreement, that a particular
depiction is a faithful representation
-Timeliness - information available in time for decision-making
-Understandability - classifying, characterising & presenting info as clearly &
concisely makes it understandable
•Trade-off among accounting principles
-Relevance vs Faithful Representation:
•Info must be timely & utilise what info is available but info is more faithfully
representative if care is taken & preparation is delayed to avoid estimation
•As time passes, reliability rises but timely relevance falls
•E.g. ADD & net realisable value of accounts receivable
D. Components of Financial Statements
•Balance sheet
•Income statement
•Statement of changes in equity
•Statement of cash flows
•Notes to financial statements
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Document Summary
Generally accepted accounting principles (gaap): rules, standards & usual practices that companies are expected to follow when preparing nancial statements, components: Accounting standards - australian accounting standards board (aasb) Framework for the preparation & presentation of nancial statements - the. Revenues & expenses re ected in accounts in period to which they relate: going concern - entity will continue in operation into foreseeable future. Making & evaluating decisions about allocation of scarce resources. Friday, 3 march 2017: prediction - can be used by users in making their own prediction, con rmation - provides feedback about previous evaluations. Affected by both nature & magnitude (materiality) of information: faithful representation - of that which it purports to portray. Information needs to be: complete - includes all information necessary for user to understand phenomenon being depicted, neutral - without bias, free from error - no errors or omissions in description of phenomenon, enhancing qualitative characteristics.
