Week 1 1B2013s2 WK1 HANDOUT

Work as an accountant when you graduate that does not

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Unformatted text preview: 15 !  Relevance of information is affected by both its nature and magnitude (i.e. materiality) (para. 29). –  Information is material if its omission or misstatement could influence the economic decisions. –  Materiality is a threshold or cut-off point. 16 Reliability Reliability !  “Information has the quality of reliability when !  Faithful representation: –  faithful representation of that which it purports to portray –  i.e. recording transactions consistent with truth or actuality it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonable be expected to represent” (para. 31) Substance over form: –  Faithful representation necessitates that transactions and events must be presented in accordance with their substance and economic reality, not merely the legal or technical requirements for reporting. Neutrality: –  freedom from bias; i.e. selection and presentation of information should not be made to achieve a predetermined result or outcome, such as impressing financial analysts or avoiding regulatory scrutiny 17 18 L3 Reliability Reliability/ Prudence or Conservatism !  Prudence/ Conservatism –  caution exercised in making estimates under conditions of uncertainty –  ensure assets or income not overstated and liabilities or expenses not understated !  Creates asymmetry in accounting !  If we have the choice between two accounting choices, we chose the most conservative one: –  Value of Inventory on the B/S: Lower of cost or the market value (Week 3) –  Value of PPE under Revaluation Method: Upward revaluations taken to reserve, but downward devaluations taken to income statement (Week 3) •  Still, deliberate understatement of asset or income, or the deliberate overstatement of liabilities and expenses to achieve a predetermined results would not achieve neutrality. 19 20 Relationship between relevance and reliability !  Relevance: can the information influence decision 21 Other Examples of the trade-off the net realisable value of accounts receivable instead of just the Accounts Receivable !  Accounting for inventory: lower of cost or market !  Revaluation for Non-current assets making. !  Reliability: is the information correct. !  Relevance gestures towards future resource decisions. !  Reliability is enhanced by a historical focus. !  Therefore, a TRADE-OFF needs to be struck !  Information may be relevant but be so unreliable in nature or representation as to be useless or potentially misleading –  E.g. legal action and the outcome and amount of the claim is uncertain => Notes? Announcement !  Allowance for doubtful debts and presenting 22 Comparability MCQ !  Users must be able to compare the financial A decision by an accountant to disregard errors involving less than 1% of profits is an application of the concept of: statements in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different entities... (para. 39) !  Adoption of IFRS a. materiality b. consistency c. disclosure d. none of the above –  harmonisation = comparability/consistency –  Compare companies •  Across countries •  Within industries •  Over time 23 24 L4 Assumptions: things we take for granted Workshop: Revision & Past Exam Question But are fundamental to accounting !  Accrual basis - the matching principle: matching expenses to the same period when revenue is recognised. Refer to Your Handouts !  Going concern !  Economic entity !  Accounting period !  Monetary unit !  Historical cost 25 26 L5...
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This note was uploaded on 09/22/2013 for the course ACCT 1511 at University of New South Wales.

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