Question

Question 1 As a professional accountant who is concerned about the qualitative characteristics of preparing financial statements. (a) You are required to: (i) Explain five (5) qualitative characteristics of IFRS that is used to prepare financial statements to your colleagues at the meeting. (ii) Explain the difference between profit and profitability. (iii) Explain the concept of going concern and the implication of revocation of going concern assumption when financial statements are prepared.

Answer 1

Ans :

Qualitative Characteristics of preparing financial statements

1.Understandability:The information must be readily understandable to users of the financial statements. This means that information must be clearly presented, with additional information as notes to assist the users of financials.

2..Relevance :The information must be relevant to the needs of the users, which is the case when the information influences their economic decisions. This may involve reporting particularly relevant information, or information whose omission or misstatement could influence the economic decisions of users.

3.Reliability : The information must be free of material error and bias, and not misleading. Thus, the information should faithfully represent transactions and other events, reflect the underlying substance of events, and prudently represent estimates and uncertainties through proper disclosure.

4.Comparability : The information must be comparable to the financial information presented for other accounting periods, so that users can identify trends in the performance and financial position of the reporting entity.

5.Timeliness : The accounting information to be presented to the users in time to fulfill their decision making needs.

ii)

Difference between profit & profitability

Profit is a single item you find on an income statement that tells you whether a business managed to have a positive balance once all the expenses, taxes and interests are subtracted from the revenues.

Profitability instead might refer to a set of metrics you need to look at to understand whether a business is sustainable from the financial standpoint.

iii)

The going concern concept is a fundamental principle of accounting. It assumes that during and beyond the next fiscal period a company will complete its current plans, use its existing assets and continue to meet its financial obligations.This underlying principle is also known as the continuing concern concept.

The going concern concept is extremely important to generally accepted accounting principles. Without the going concern assumption, companies wouldn't have the ability to prepay or accrue expenses. Assets are also reported on the balance sheet at historical costs because of the going concern assumption.