Primary Users of Accounting Information PDF

Preview

Summary

Download Primary Users of Accounting Information PDF

Description

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

1.

Explain

the

primary

users and their information needs. The first one is the Internal Users; these are the users who are inside the company, they also do the decision-making.  

Owners – provide capital and assess if the company needs extra funding. Managers – need financial information because they plan and organize the firm.

The second one is the External Users.

   

2.

Investors – “Should I invest in the company?” Creditors – “Can they pay their obligations and liabilities with interest in time?” Customers – those dependent with the firm are concerned about the business continuity. Employees – interested in knowing how well a company is performing as it could have implications for their job security and income.

Explain authoritative status of conceptual framework.

the

If there is a Standard or Interpretation that specifically applies to a transaction, it overrides the Framework. In the absence of a Standard or an Interpretation that specifically applies to a transaction, management should consider the applicability of the Framework in developing and applying an accounting policy that results in information that is relevant and reliable.

3.

Explain

the

two

fundamental qualitative characteristics. a. Relevance – relevant information is capable of making a difference in the decisions made by users. Relevance requires financial information to be related to an economic decision. Otherwise, the information is useless.

b. Faithful Representation – the financial information in the financial reports should represent what it purports to represent. Meaning, it should show what really are present and what really happened, as the case may be.

There are three characteristics of faithful representation:

1. Completeness (adequate or full disclosure of all necessary information), 2. Neutrality (fairness and freedom from bias), and 3. Free from error (no inaccuracies and omissions).

4.

Enumerate explain the four enhancing qualitative characteristics.

and

a) Comparability – Comparability is the Qualitative characteristic that enables users to identify and understand similarities in and differences among items. Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about other entities and with similar information about the same entity for another period or date. b) Verifiability – A company's accounting results are verifiable when they're reproducible, so that, given the same data and

assumptions, an independent accountant can produce the same result the company did. c) Timeliness – The timeliness of accounting information refers to the provision of information to users quickly enough for them to take action. Information becomes obsolete and useless if it is not reported within time. Usually the Statute specifies the time for preparation and presentation of Financial reports. d) Understandability – A principle which states that a company's financial information should be presented in such a way that a person with a reasonable knowledge of business and finance, and the willingness to study the information, should be able to comprehend it. This principle is included in the Accounting Standards Board's Statement of Principles.

5.

Explain the underlying assumptions in the preparation of financial statements. Accrual Basis – Under the accrual basis, the effects of transactions and other events are recognized when they occur, and not as cash is received or paid. Under the accrual’s basis, events are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Going Concern Basis – The going concern basis of accounting is the assumption in preparing the financial statements that an entity will continue in operation for the foreseeable future and does not plan to go into liquidation, and will not be forced into liquidation or to curtail its operations.

6.

What are the essential characteristics of an asset? a) Future Economic Benefits – is the essence of an asset. This means that the asset has capacity to provide services or benefits to the enterprises that use them. In a business enterprise, that service potential or future economic benefit eventually results in net cash inflows to the enterprise.

b) Control by a Particular Enterprise – To have an asset, a business enterprise must control future economic benefit to the extent that it can benefit from the asset and generally can deny or regulate access to that benefit by others, for example, by permitting access only at a price.

c) Occurrence of a Past Transaction or Event – Assets imply the future economic benefits of present assets only and not the future assets of an enterprise. Only present abilities to obtain future economic benefits are assets and these assets are the result of transactions or other events or circumstances affecting the enterprise.

7.

What are the essential characteristics of a liability? Current liabilities (short-term liabilities) – liabilities that are due and payable within one year. Non-current liabilities (long-term liabilities) – liabilities that are due after a year or more. Contingent liabilities – liabilities that may or may not arise, depending on a certain event.

8.

Explain the recognition criteria for the elements of the financial statements It is probable that any future economic benefit associated with the item will flow to or from the enterprise and the item’s cost or value can be measured with reliability. 

An asset is recognized in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably.



A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from

the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. 

Income is recognized in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities



Expenses are recognized when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets.

9.

Explain derecognition? Derecognition refers to the removal of an asset or liability (or a portion thereof) from an entity's balance sheet. Derecognition questions can arise with respect to all types of assets and liabilities. This project focuses on financial instruments.

10. categories of measurement.

Explain

the

two

Under the historical cost doctrine , assets are generally carried on the balance sheet at their acquisition cost (adjusted for depreciation and, in some cases, impairment), and liabilities are usually carried at the prices at which they were incurred. Current cost is the cost that would be required to replace an asset in the current period. This derivation would include the cost of manufacturing a product with the work methods, materials, and specifications currently in use. The concept is used to generate financial statements that are comparable across multiple reporting periods

11. Distinguish capital concept from physical capital concept.

financial

Physical Capital – A vision of factories and equipment often comes to mind when the term "physical capital" is invoked, and this also includes the inventory sitting in stockrooms or warehouses, equipment from the tiniest screwdriver to the fleet of 18-wheel trucks, and fixed structures like office buildings, shopping malls, or factories. Physical capital includes tangible items used for actual production of the good or service provided by a company.

Financial Capital – Financial capital, on the other hand, is the legal ownership of all physical capital, as well as the monetary value of any asset that could be liquidated for cash. In fact, cash on hand is a form of financial capital, but so are stock shares, land titles, and other forms of property ownership. Financial capital might exist in large part as electronic entries in a computer database somewhere that denote how much money exists in a company's checking or savings accounts....