Theory
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Nithya's selvanTheory
Uploaded by
Nithya's selvanTHEORY
1) Explain the term “regulatory framework” as it applies to financial reporting. Why is
this framework needed? (5m)
• The term regulatory framework" refers to the collection of rules and regulations
which governing financial reporting.
• Applies mainly to companies and consists of legislation, accounting standards and
stock exchange regulations.
Why need?
• This framework is needed so as to ensure that shareholders and other
stakeholders receive financial statements.
• It helps prevent fraud and misrepresentation, protecting investors and other
stakeholders.
• It holds companies accountable for their financial performance and position.
2) Explain the purpose of accounting standards (whether national or international)
and identify the advantages that stem from the 1 standardiaation of accounting
practice. Are there any disadvantages? (3m)
• The main purpose of accounting standards is to reduce or eliminate variations
in accounting practice and introduce uniformity into financial reporting.
• The advantages include faithful representation and comparability.
• The disadvantages include lack of flexibility and potential inappropriateness of
single accounting treatments.
• The IASB allows overriding of standards in rare cases to ensure faithful
representation
3) The qualitative characteristics of relevance, faithful representation and
comparability which are identified in the IASB Conceptual Framework are some of
the attributes that make financial information useful to the various users of financial
statements. Explain what is meant by relevance, faithful representation and
comparability and how they make financial information useful. (12m)
• Relevance
Relevance means the information can influence users' decisions.
It has predictive or confirmatory value, helping users forecast future outcomes or
verify past evaluations.
For example, current revenue trends are relevant for predicting future profitability.
• Faithful representation
This refers to information that accurately depicts what it claims to represent.
It should be complete, neutral, and free from error.
For instance, disclosing all significant liabilities provides a faithful representation of a
company's financial obligations.
• Comparability
Comparability allows users to identify similarities and differences between sets of
information.
It enables comparison of a company's performance over time and between different
companies.
Using consistent accounting methods across periods enhances comparability.
• Verifiability
The ability to compare financial statements over time is important to enable users to
identify trends in the entity’s financial position and performance.
Enables users to recognise similarities or differences between two sets of economic
phenomena. Example: An independent audit verifies financial statements.
• Timeliness
This means providing information in time for it to influence decisions.
Older information is generally less useful.
Example: Quarterly reports provide timely updates on a company's performance.
• Understandability
Information should be presented clearly and concisely so that users with a reasonable
knowledge of business and finance can comprehend it.
Example: Using clear language and providing explanations for complex items in
financial reports
4) Identify the main classes of information that should be presented in general
purpose financial reports?
(a) information about the financial position of the reporting entity (i.e. information about
the entity's economic resources and claims against those resources)
(b) information about changes in financial position caused by the entity's financial
performance during the reporting period (eg. the making of a profit)
(c) information about the entity's cash flows during the reporting period
(d) information about changes in financial position which have not been caused by the
entity's financial performance (e.g.changes caused by share issues and the payment
of dividends)
5) Advantage preparing cash flow statement
• Provides a clearer picture of a company's ability to pay bills and invest.
• Helps plan for future expenses or investments.
• Reveals how efficiently a company converts income to cash.
• Shows cash used for investments and obtained from financing separately from
operations.
• Helps predict future cash needs and potential financial difficulties.
• Assists management in making informed decisions about dividends, expansion, or
debt repayment.
• Enables stakeholders to spot trends in cash generation and usage over time.