a Unit 3 Area of Study 1b

Accounting Assumptions

Period
Entity
Going concern
Accrual basis

Period Assumption

The assumption that reports are prepared for a specific period of time, such as a month or year, to obtain comparability of results.

Entity Assumption

the assumption that the records of business activities of an entity are kept completely separate from those of the owner of the entity, as well as from those of other entities.

Going Concern Assumption

The assumption that financial reports are prepared with the expectation that the entity will continue to operate in the future.

Accrual Basis Assumption

The assumption that revenue is recognized in the period in which the expected inflow of economic benefits can be measured in a faithful and verifiable manner.

Qualitative Characteristics

timeliness
understandability
relevance
faithful representation
comparability
verifiabillity

Timeliness

information should be available to decision-makers in time to influence decisions.

Understandability

financial information is comprehensible to users with reasonable business and economic knowledge.
information should be presented clearly and concisely.

Relevance

Information that directly assists users in making decisions related to economic outcomes.

Faithful Representation

information reported must be a faithful representation of the real-world economic event it represents
- free from error, neutral, complete

Comparability

Information about an entity is more useful if it can be compared with similar information about other entities, and with similar information about the same entity for another date or period.

Verifiability

different observers can reach a consensus that an event is faithfully represented

Current/non current Asset

A present economic resource controlled by the entity as a result of past events

Current/non current Liability

A present obligation of the entity that results in an outflow of future economic benefit due to past events

Owner’s Equity

The residual interest after liabilities are subtracted from assets

Revenue

An increase in assets or decrease in revenues that increases owners’ equity, other than those relating from contributions from the owner

Expense

A decrease in assets or increase in liabilities that decreases owners’ equity other than those relating to distributions to the owner

Accounting equation

Assets - liabilities = owner’s equity

Product cost

Any cost incurred in getting a piece of inventory into a condition and location ready for sale, allocated to each individual inventory on a logical basis

Period cost

Any cost incurred in getting a piece of inventory into a condition and location ready for sale, which cannot be allocated to each individual inventory on a logical basis

Inventory turnover

Measured in faster/slower

Lower days faster, higher days slower

Net realisable value

Estimated selling price - direct selling expense no gst

How to enhance inventory control

• physically rotating inventory on hand so oldest is first

• ensuring adequate security for products to decrease theft/fraud

• introducing complementary products to boost sales

Accounts receivable turnover

the average time it takes for accounts receivable to settle accounts

measured in faster/slower

Accounts payable turnover

the average time it takes for business to settle accounts with accounts payable

measured in faster/slower

What to measure accounts payable/receivable turnover with (Non financial information)

• past performance

• competitor performance

• credit terms offered

Bad debts

debts that have to be written off as irrecoverable or uncollectible since it’s confirmed that Accounts Receivable is unable to pay due to liquidation/bankruptcy

Doubtful debts

debt that is unlikely to be collected but not written off since it’s not confirmed that Accounts Receivable cannot pay, quantified by past experience

Ethical considerations

The social and environmental consequences of a financial decision

QCs about inventory write down

faithful representation, relevance

QCs/ethics about bad and doubtful debts

Positive of recording:

• faithful rep the true state of profit/sales in the business

• owner has all relevant info to affect decision making

• ethical since AR isn’t overstated

Negative:

• estimates that cannot be verified from source docs

AAs about bad and doubtful debts

When bad debt is in the same period as credit sale this fulfills accrual basis

Sometimes it isn’t so there is estimate

How to improve inventory control

Introduce complementary products

Monitor seasonal products

Monitor selling prices

Actions for too slow ITO

Maintain lower levels of inventory

Implement strategies to increase sales

Actions for too fast ITO

Increase selling price

Increase inventory levels

How to manage accounts receivable

Offer discounts to fast paying people

Legal action

Sending emails/phone reminders

Internal control

A system of procedures that protect the assets of a business and ensure the accuracy of its accounting system

Internal control and cash/bank account

Maintain accounting journals

take cash home/don’t leave in premises

Internal contorl and physical assets

Security to protect

Video surveillance

QCS about period/product cost

Relevance - is this useful for decision making to be included in reports?

Why does inventory write down happen

Obsolete

damaged

out of season

QCs about inventory write down

Faithful representation