acct 1511 notes
Chapter 6 – Financial Reporting Principles, Accounting Standards and Auditing
6.2 Accounting Principles and the use of Accounting Information Doing accounting takes expert knowledge, considerable experience and continuous attention to new problems and solutions. Concepts and principles are important, as they form logical structure that practising accountants use every day to consider problems to make recommendations GAAP (Generally Accepted Accounting Principles) applied differently for different entities Rules, standards and usual practices that companies are expected to follow when preparing financial statements Stock market crash of 1929 brought GAAP AASB (Aust ...view middle of the document...
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acct 1511 notes
6.3 Framework for the Preparation and Presentation of Financial Statements
Framework includes the coverage of: - objectives of financial reports - assumptions underlying financial reports - qualitative characteristics that determine the usefulness of financial reports – assets and liabilities - definition of the elements from which financial reports are constructed: assets, liabilities, equity, income and expenses - recognition and measurement of the elements of financial statements Framework makes distinction between general purpose financial report (for most users who rely on this as main source of info) and special purpose financial report (list for issues of shares – outside scope of Framework).
Users of financial reports Investors – info on risk and return, including shareholders – buy, hold or sell? Employees – including unions – stability and profitability and whether company can afford employee benefits Lenders – whether interest and loans will be able to be paid off Suppliers and other trade creditors – whether amounts owing can be paid Customers – continuance of entity, e.g. with warranties Governments and their agencies – allocation of resources & tax Public – substantial contribution to public – e.g. employment Framework regards investors as the majority of users, so satisfy most the needs of investors
The objective of financial reports Objective: provide information about financial position, financial performance and cash flows that is useful to users in making economic decisions Users need evaluations of cash generation – due to its liquidity to buy inventory, pay wages, distribute shares etc Users need info on financial position, financial performance and cash flows to evaluate this Financial position – balance sheet – economic resources (NCA), financial structure (who finances assets), information on liquidity and solvency (L & ratios) Financial performance – income statement – profitability, employment of resources, potential chances in assets controlled by the entity Movement in cash – cash flow statement – operating, investing and financing decisions
acct 1511 notes
Underlying Assumptions Accrual basis of accounting Going Concern - entity will continue to operate in the foreseeable future - book value = cost – accumulated depreciation - liquidation value can be a lot less than book value - this is because when companies close down, they may not be able to sell off its assets at the book value Other authors also regard accounting entity, accounting period and monetary assumptions as key underlying assumptions.
Key Qualitative Attributes Understandability – concern on complexity of financial statements that could not be understood by experts. Pozen committee examined US financial reporting system and made recommendations on the usefulness...