Introduction to accounting
Accounting is the language of business. Through a systematic series of steps known as accounting cycle, it gathers information about business transactions and generates reports about the entity. Here are question answers to help understand accounting better if you need to tutoring on the same sign up with us.
Explain four qualities of useful accounting information with reference to the international accounting standards board that is IASB framework.
The four qualities of useful accounting information are understandability, relevance, reliability and compatibility.
The information provided in financial statement, should be easily understandable by user in order for them to make informed economic decision when relying on the financial statements. For this purpose, users are assumed to have reasonable knowledge of business and economic activities.
The information in financial statement should be relevant for the decision-making needs of the user. Therefore, it should help users evaluate past, present or future events or confirming or correcting, their past evaluations.
Information has the quality of reliability when it is free from material error and bias. It can be used to represent faithfully what it purports to represent or could reasonably be expected to represent.
User must be able to compare the financial statement of an entity through time in order to identify trends in its financial position and performance. User must be able to compare the financial statements of different entities in order to evaluate their financial position, performance and changes in financial position.
Explain the following accounting assumptions;
Revenue and expenses are recognized on an accrual basis. In this respect, revenue is recognized when it is realized not necessarily when money is received. Expense are recognized when incurred, that is, when an obligation to pay the expense arise not necessarily when money is paid.
This is the assumption that a business enterprise will continue to operate for an indefinite period of time and that the business enterprise has no intention to curtail materially the scale of its operations.
a. Briefly explain why the following parties may be interest in the financial statement of an organization:
1. Employees: they provide the workforce in the organization. They can either be present or potential employees who look forward to being employed in the organization. They are interested with the financial statement in order to evaluate their term of service and bargain for better terms. The information also gives them job security since they are able to know about the continuity of the organization.
2. Financial analysts: These are professionals who require all the accounting information of a business. They carry different types of analysis in order to give professional advice and information about business activities.
3. The government: this information helps the government in planning, resource allocation and regulation to create an enabling working environment. It also helps in tax assessment and ensures that the correct tax amount is being remitted
4. Public: This is the general population in the economy. The information helps them evaluate the social responsibility of the organization.
b. State any two circumstances that may hinder a firm from improving on the usefulness of it financial statements
Circumstance that hinder a firm from improving on the usefulness of its financial statement:
1. Information that is based and prejudiced may hinder a firm from improving on the usefulness of its financial statements. The information must be objectives and neutral and free from biasness.
2. Information that does not present true and fair view. Information should present true and fair view in light of legal and other requirement. It must be realistic and should relate to the actual truth to the ground. If information is not represented this way, it will hinder the usefulness of the financial statement.
c. Dickson Kimula is an electronic equipment dealer. He has sought your advice on certain matters relating to his financial statement for the year ended 30th April 2006.
Citing the relevant accounting principle, advise Dickson Kimula how to deal with each of the following:
I. All his electronics equipment is sold with a one-year warranty for repair and service, which on average cost $480 per item. The value of equipment returned annually average 1% of sales. The sales for the year ended 30th April 2006 were 200,000 units
The cost for repairs and service which is equivalent to 1% of sale should be considered immaterial because it cannot influence decision making. This value should therefore be written off to the income statement.
II. Closing stock as at 30th April 2006 was valued at $500,000. However, some items of stock whose initial cost was $200,000 can only realize $150, 000 after major repairs costing $40,000.
The item in stock which were repaired should be valued at lower of cost or net realizable value. The major repairs costing $40,000 made on the stocks should be incorporated on the cost of the stocks.
III. Sales for the year include deposit from customers amounting to $2,000,000. The goods had not been delivered to customers as at 30th April 2006
According to the realization concept sales or profit should be realized when goods are sold and a customer incurs a liability for them and not when an order is received. The $ 2000,000 should be deducted from the sales
IV. The firm’s V.A.T returns for the month of April 2006 had not been filed with the Revenue Authority. The penalty for late filing of V.A.T return is $10,000
The prudence concept states that once a firm anticipates incurring losses then such losses should be provided for in the books of accounts. The penalty for late filing of VAT returns of $1,000 should be provided for in the books.