Question

a) For which classification of users are financial statements prepared? What characteristic of these users makes the development of generally accepted accounting principles necessary?

b) Describe the three concepts from the Conceptual Framework that work together to create accrual accounting

Answer 1

A)The financial statements are prepared for 8 users :

1) investors

2) Employee

3) Management

4) Creditors

5) public

6) Lenders

7) Customer

8) Government

The characteristics of these users were they want to acquire an understanding of financial information i.e, the asset , liabilities , revenue, expenses, disclosure , of an entity.

Owners and managers need to take decision about the business . Investors need for their investment decision or they want to exit the company by selling the stock .

Financial institution and government to check the financial position of the business so to grant any loan or subsidy.

B) The three concepts from conceptual framework are :

1) Initial measurements- Initial and subsidiary measurements are to be treated parellelly . They cannot be treated separately. Hence , while recognizing any asset , liability, revenue and expense one has to determine by considering both initial and subsidiary measurements

2) Balance sheet - These are statement which provides the information of financial position of the firm on that date. It has to prepared on accrual basis so a true and fair view of the entity can be projected to the users of the financial statements.

3) Cost based Measures- The framework defines the element of financial statements. It deals with the recognition of the element and recordings them to the accounting period in which they had taken place irrespective of the fact whether cash is involved or not .

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