Acca f3 Financial Accounting (int) Study Text
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- Bu səhifədəki naviqasiya:
- If the going concern assumption is not followed
- In the accruals basis of accounting
30 3: Accounting conventions Part B The qualitative characteristics of financial information and the fundamental bases of accounting Question
A retailer commences business on 1 January and buys inventory of 20 washing machines, each costing $100. During the year he sells 17 machines at $150 each. How should the remaining machines be valued at 31 December in the following circumstances? (a) He is forced to close down his business at the end of the year and the remaining machines will realise only $60 each in a forced sale. (b)
He intends to continue his business into the next year. Answer
(a) If the business is to be closed down, the remaining three machines must be valued at the amount they will realise in a forced sale, ie 3 × $60 = $180. (b)
If the business is regarded as a going concern, the inventory unsold at 31 December will be carried forward into the following year, when the cost of the three machines will be matched against the eventual sale proceeds in computing that year's profits. The three machines will therefore be valued at cost, 3 × $100 = $300. If the going concern assumption is not followed, that fact must be disclosed, together with the following information. (a) The basis on which the financial statements have been prepared. (b) The reasons why the entity is not considered to be a going concern. 2.7 Accruals basis of accounting
expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Framework.
Entities should prepare their financial statements on the basis that transactions are recorded in them, not as the cash is paid or received, but as the revenues or expenses are
period to which they relate. According to the accrual assumption, in computing profit revenue earned must be
expenditure incurred in earning it. This is also known as the matching convention. 2.8 Example: Accrual Emma prints 20 T-shirts in her first month of trading (May) at a cost of $5 each. She then sells all of them for $10 each. Emma has therefore made a profit of $100, by matching the revenue ($200) earned against the cost ($100) of acquiring them. If, however, Emma only sells 18 T-shirts, it is incorrect to charge her income statement with the cost of 20 T-shirts, as she still has two T-shirts in inventory. If she sells them in June, she is likely to make a profit on the sale. Therefore, only the purchase cost of 18 T-shirts ($90) should be matched with her sales revenue ($180), leaving her with a profit of $90. Key term Part B The qualitative characteristics of financial information and the fundamental bases of accounting 3: Accounting conventions 31 Her statement of financial position will look like this. $ Assets Inventory (at cost, ie 2 × $5) 10 Accounts receivable (18 × $10) 180 190
Capital and liabilities Proprietor's capital (profit for the period) 90 Accounts payable (20 × $5) 100 190
However, if Emma had decided to give up selling T-shirts, then the going concern assumption no longer applies and the value of the two T-shirts in the statement of financial position is break-up valuation not cost. Similarly, if the two unsold T-shirts are unlikely to be sold at more than their cost of $5 each (say, because of damage or a fall in demand) then they should be recorded on the statement of financial position at their net realisable value (ie the likely eventual sales price less any expenses incurred to make them saleable) rather than cost. This shows the application of the prudence concept, which we will look at shortly. In this example, the concepts of going concern and accrual are linked. Since the business is assumed to be a going concern, it is possible to carry forward the cost of the unsold T-shirts as a charge against profits of the next period. 2.9 Consistency of presentation To maintain consistency, the presentation and classification of items in the financial statements should
(a)
There is a significant change in the nature of the operations or a review of the financial statements indicates a more appropriate presentation. (b)
A change in presentation is required by an IFRS. 2.10 Materiality and aggregation All material items should be
Amounts which are immaterial can be aggregated with amounts of a similar nature or function and need not be presented separately. Materiality. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. (IAS 1) An error which is too trivial to affect anyone's understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail. Determining whether or not an item is material is a very subjective exercise. There is no absolute measure of materiality. It is common to apply a convenient rule of thumb (for example material items are those with a value greater than 5% of net profits). However some items disclosed in the accounts are regarded as particularly sensitive and even a very small misstatement of such an item is taken as a material error. An example, in the accounts of a limited liability company, is the amount of remuneration paid to directors of the company. The assessment of an item as material or immaterial may
example, the income statement of a business shows the expenses incurred grouped under suitable captions (heating and lighting, rent and local taxes, etc); but in the case of very small expenses it may be appropriate to lump them together as 'sundry expenses', because a more detailed breakdown is inappropriate for such immaterial amounts. Key term Yüklə 3,78 Mb. Dostları ilə paylaş:
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