AC102 Notes
1
Content Page
,Contents
ACCOUNTING CONVENTIONS................................................................................................................ 3
STATEMENT OF FINANCIAL POSITION............................................................................................. 5
INCOME STATEMENT................................................................................................................................ 7
CASH FLOW STATEMENT........................................................................................................................ 9
ANALYSIS OF FINANCIAL STATEMENT.......................................................................................... 11
CONSOLIDATED BALANCE SHEET.................................................................................................... 15
CONTEMPORARY ACCOUNTING ISSUES......................................................................................... 17
2
Content Page
, -----------------------------------------------------------------------------------------------------------------
ACCOUNTING CONVENTIONS
-----------------------------------------------------------------------------------------------------------------
Conventions
Historical Cost Convention: the value of assets shown on the statement of financial
position should be based on their acquisition cost.
- it could minimise problems of measurement reliability.
Fair Value Convention: a market-based measure, where the value of assets shown on
the financial position should be evaluated based on their current market value.
Going Concern Convention: financial statements are prepared on the assumption that
the business will continue operations for the foreseeable future (at least in the next 12
months), unless this is known to be incorrect.
- Management’s Responsibility: to make an assessment of whether the use of
going concern basis is appropriate or not.
- Auditor’s Responsibility: to obtain sufficient audit evidence about the
appropriateness of management’s use of going concern basis.
Business Entity Convention: businesses and their owners are treated as separate and
distinct for accounting purposes.
Prudence Convention: accounting judgements should reflect caution, where:
- Losses and Costs should not be understated
- Profits and Resources should not be overstated
Dual Aspect Convention: each transaction has two aspects, both of which affects the
company’s position.
Money Measurement Convention: only resources that can be measured reliably in
monetary terms will be incorporated into financial statements.
Accruals Convention: revenues and expenses are recognised when they are earned or
incurred, rather than when the cash is received or paid
Matching Principle: expenses should be equivalent to the revenue that is generated.
- relates to the Accruals Convention
-----------------------------------------------------------------------------------------------------------------
Qualitative Characteristics of Useful Financial Information
Faithful Representation: a depiction of financial information should prioritise its
substance over the form, which is:
- Complete: all of the required information is provided
- Neutral: information is presented without bias
- Free from Error
Relevance: financial information has predictive or confirmatory value, which is:
3
Content Page
1
Content Page
,Contents
ACCOUNTING CONVENTIONS................................................................................................................ 3
STATEMENT OF FINANCIAL POSITION............................................................................................. 5
INCOME STATEMENT................................................................................................................................ 7
CASH FLOW STATEMENT........................................................................................................................ 9
ANALYSIS OF FINANCIAL STATEMENT.......................................................................................... 11
CONSOLIDATED BALANCE SHEET.................................................................................................... 15
CONTEMPORARY ACCOUNTING ISSUES......................................................................................... 17
2
Content Page
, -----------------------------------------------------------------------------------------------------------------
ACCOUNTING CONVENTIONS
-----------------------------------------------------------------------------------------------------------------
Conventions
Historical Cost Convention: the value of assets shown on the statement of financial
position should be based on their acquisition cost.
- it could minimise problems of measurement reliability.
Fair Value Convention: a market-based measure, where the value of assets shown on
the financial position should be evaluated based on their current market value.
Going Concern Convention: financial statements are prepared on the assumption that
the business will continue operations for the foreseeable future (at least in the next 12
months), unless this is known to be incorrect.
- Management’s Responsibility: to make an assessment of whether the use of
going concern basis is appropriate or not.
- Auditor’s Responsibility: to obtain sufficient audit evidence about the
appropriateness of management’s use of going concern basis.
Business Entity Convention: businesses and their owners are treated as separate and
distinct for accounting purposes.
Prudence Convention: accounting judgements should reflect caution, where:
- Losses and Costs should not be understated
- Profits and Resources should not be overstated
Dual Aspect Convention: each transaction has two aspects, both of which affects the
company’s position.
Money Measurement Convention: only resources that can be measured reliably in
monetary terms will be incorporated into financial statements.
Accruals Convention: revenues and expenses are recognised when they are earned or
incurred, rather than when the cash is received or paid
Matching Principle: expenses should be equivalent to the revenue that is generated.
- relates to the Accruals Convention
-----------------------------------------------------------------------------------------------------------------
Qualitative Characteristics of Useful Financial Information
Faithful Representation: a depiction of financial information should prioritise its
substance over the form, which is:
- Complete: all of the required information is provided
- Neutral: information is presented without bias
- Free from Error
Relevance: financial information has predictive or confirmatory value, which is:
3
Content Page
