Concepts and Qualitative characteristics ncea level 2 nz 2013

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All the business information , is it making a profit to pay owner and expenses, will the business continue. Is there enough security to raise a loan from the bank for expansion. Financial Statements, profit, return on equity, competition

Owner information needs

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Loans and the interest, will they be paid when due. Assets vs Liabilities, income vs expenses.sufficient assets for security for a loan? Credit checks. Financial Statements, - Profit- Equity Ratio, cash flow, liabilities

Lenders information needs

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They are interested whether amounts owing to them will be paid on time. Current and liquid ratio’s, credit rating, other liabilities

Suppliers information needs

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Information about the stability and profitability, and assess the ability of the entity to provide wages and retirement benefits and employment opportunities as well as continued employment.

Employees information needs

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Amounts for depreciation and doubtful debts are based on estimates and so the net profit may not be accurate.

Limitation of Income statement

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Accumulated Depreciation and Allowance Doubtful debts are based on estimates

Limitation of Statement of Financial Position

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Based on past cash receipts and payments and does not show future planned cash receipts or payments you would need a budget for that.

Limitation of Cashflows

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Show the rules and valuation methods and assumptions followed, measuring the financial elements when preparing the financial statements.

Purpose of Accounting Policies

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Show the financial performance of the business for the period. Details the entity’s income, expense and profit or loss for the period.

Purpose of Income Statement

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Shows the position of the business at the end of the period. The entity’s assets, liabilities, and equity at a point in time.

Purpose of Statement of Financial Position

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The financial affairs of the business are separate and distinct from the affairs of the owner.

Accounting Entity Notion

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All transactions recorded and reported in financial statements are recorded in NZ dollars/dollar terms.

Monetary Measurement

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Entities present financial statements on an annual basis so profit, assets, liabilities, revenue and expenses. it enables comparisons from one year to the next.

Period Reporting

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Assets are recorded at the amount of cash paid at the time of purchas

Historical Cost

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The effects of transactions and other events are recognised when they occur and are reported in the financial statements of the period to which they relate.

Accrual Basis Assumption

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The financial statements are prepared on the assumption that the business will continue its present operations for the foreseeable future and there is no intention or need to liquidate or cut back on the business operations.

Going Concern

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Expenses used up in the current period. They are costs incurred to earn revenue and affect the year’s profit and owners’ equity. E.g rates, insurance, registration.

Revenue Expenditure

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Item purchased that benefits for more than one accounting period. Creates an asset and does not affect Equity.( purchase of building, costs incurred in installing new equipment or improvements made to an existing asset that extend its useful life)

Capital Expenditure

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Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Depreciation

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Assumes the consumption of economic benefits the asset can provide occurs evenly over its useful life eg The wear and tear on the outside of a Building is consistent each accounting period.

Straight line Depreciation

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the consumption of economic benefits of the asset is greatest in the first years of the assets useful life. Eg a computer is obsolete after about 3-4 years.

Dimishing Value depreciation

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The consumption of economic benefits of the asset is related to the amount the asset is used rather than age. eg a car's economic life is measured in kilometres travelled. The assets economic benefit is limited by the amount it is used

Units of use depreciation

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A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow into the entity.

Asset

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Probable that the future economic benefit associated with this will flow to the entity AND has a cost or value that can be measured reliably. (materiality concept needs to be taken into account when deciding if it is an asset or an expense)

Asset recognition criteria

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Present obligation of the entity arising from past events, the settlement is expected to result in an outflow from the entity of resources/ economic benefits

Liability

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Probable that any future economic benefit associated with this will flow from the entity AND The settlement has a cost or value that can be measured reliably

Liability recognition criteria

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Assets – liabilities The residual interest in assets after deducting all liabilities of an entity at any point of time.

Equity

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Increases the economic benefits in the accounting period that inflows or enhances an asset or decreases a liability, that results in an increase in equity, other than contributions from the owner.

Income

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Probable that any future economic benefit associated with the item will flow to the entity; and the item has a cost or value that can be measured with reliability.

Income recognition criteria

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Decrease in economic benefit during the accounting period which decreases assets (or increases in liabilities) that result in a decrease in equity by decreasing profit, and is not owner’s drawings

Expenses

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Probable that any future economic benefit associated with the item will flow from the entity; and the item has a cost or value that can be measured with reliability.

Expense recognition criteria

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Is an increase in the net assets of a business which is not contributions by the owners.

Profit

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Financial information influences the economic decisions of users by helping users evaluate present or future events (predictive role) or by helping users confirm or correct their past evaluations (confirmatory role).

Relevance

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Information is affected by its size and nature and if its inclusion or non inclusion could influence the economic decisions of users taken. if its omission or misstatement.

Materiality (Relevance)

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Information when it is free from material error and bias and can be depended upon by users to say what it should or is expected to represent. Information should be complete, neutral and free from error

Faithful representation

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Users must be able to compare financial statements through time in order identify trends in the entity’s financial position and performance or against financial statements of different entities.

Comparability

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Accounting information provided to users should be available in time to be capable of influencing their decisions, otherwise it loses its relevance.

Timeliness

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When different knowledgeable and independent people can reach agreement that an event, account or transaction is faithfully represented.

Verifiability

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The financial statements must be readily understandable by users who have a reasonable knowledge of business and economic activities and a willingness to study the information with reasonable diligence.

Understandability

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Comparability, timeliness, verifiability and understandability are?

Enhanced Qualitative characteristics

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