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Which of the following qualitative characteristics of accounting information ensures that users can compare the financial statements of different entities?
What is the overriding consideration in achieving a balance between timeliness and fundamental characteristics of relevance and faithful representation?
Which of the following qualitative characteristics of accounting information ensures that financial information is free from error and bias?
What is the primary purpose of verifiability in accounting information?
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Which of the following qualitative characteristics of accounting information ensures that financial information is presented in a way that is easy to understand by users?
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What is the primary purpose of comparability in accounting information?
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Which of the following qualitative characteristics of accounting information is most closely related to the concept of completeness?
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What is the trade-off in achieving timeliness in financial reporting?
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What is the primary assumption made by an accountant when preparing financial statements?
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Which of the following is an example of the going concern assumption?
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What is the situation where the going concern assumption should be rejected?
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What is the fundamental qualitative characteristic of financial statements that ensures that the information presented is faithful and accurate?
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Which of the following accounting principles states that the financial statements should be presented in a way that is consistent with the substance of the transactions rather than their legal form?
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What is the accounting principle that states that the financial statements should be prepared on the assumption that the business will continue to operate for the foreseeable future?
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Which of the following is an example of the accruals basis accounting principle?
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What is the main principle of accrual accounting?
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What is the fundamental qualitative characteristic of financial statements that ensures that the information presented is relevant and useful to users?
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What is the purpose of matching principle in accrual accounting?
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What is the principle of consistency in accounting?
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What disclosure is required when a company changes its accounting principle?
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What is the main principle of double entry accounting?
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What is the purpose of accrual accounting in financial statements?
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What is the result of not following the consistency principle in accounting?
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What is the benefit of using accrual accounting in financial statements?
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Study Notes
Accruals
- Income is recognized in the financial statement as it is earned, not when cash is received.
- Expenditure is recognized as it is incurred, not when it is paid for.
- Revenue earned during an accounting period is matched with the expenses associated with earning that revenue.
Accounting Principles
- Consistency is essential in accounting, where similar items within a single set of accounts should be given similar accounting treatment.
- Consistency also applies from one period to the next in accounting for similar items.
- A business can change its accounting method, but it must be done with valid reasons and disclosed in the financial statements.
- Disclosure requirements include:
- Nature of the change
- Reasons for the change
- Effect of the change on current net income, if significant
- Cumulative effect of the change on past income
Double Entry (Duality)
- Every financial transaction affects the entity in two ways, giving rise to two accounting entries, one a debit and the other a credit.
Fundamental Qualitative Characteristics
- Relevance
- Faithful representation
Enhancing Qualitative Characteristics
- Comparability
- Verifiability
- Timeliness
- Understandability
- Materiality
- Substance over form
- Going concern
- Business entity
- Accruals basis
- Prudence
Going Concern Assumption
- The business will continue to operate for the foreseeable future, and there is neither the intention nor the necessity to put the company into liquidation.
- Assets are carried at their original cost, rather than their current liquidation values.
- Examples:
- Asset purchased for $50,000, expected to last for 5 years, with depreciation cost of $10,000 per annum.
- Going concern assumption is rejected when the business is going to close down in the near future or where there is a shortage of cash.
Qualitative Accounting Characteristics
- Completeness: all necessary information must be included.
- Neutrality: objective and without bias, financial information not manipulated in any way.
- Freedom from error: no errors or omissions made in producing financial information.
Comparability
- Users must be able to compare the financial statements/information over time and across different entities.
- Comparability is achieved through a combination of consistency and disclosure.
Verifiability
- Means that a number of users would broadly agree that faithful representation of financial information has been achieved.
- Verifiability provides assurance to users regarding its credibility and reliability.
Timeliness
- Information may become less useful if there is a delay in reporting it.
- There is a trade-off between timeliness and fundamental characteristics of relevance and faithful representation.
Understandability
- Financial information needs to be capable of being understood by users having a reasonable knowledge of business and economic activities and accounting.
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Description
Learn about accruals in accounting, including when to recognize income and expenses, and how to match revenue with associated expenses.
