Question

• What are the assumptions and principles of financial reporting?

·        What are the characteristics of useful information (pg 49) and the constraints in accounting (pg 51)?

Answer 1

1.

Financial statements are prepared based on the following underlying assumptions:

Economic entity assumption

Business operations can be reported for an entity which is separate from its owners.

Going concern assumption

The entity will continue its operations in the foreseeable future.

Monetary unit assumption

Business activities can be measured in monetary units.

Periodicity assumption

Business operations can be reported separately in each accounting period.

Generally Accepted Accounting Principles (GAAP) are rules, standards and usual practices of accountancy in the preparation of financial statements. The Australian Accounting Standards Board (AASB) has created a AASB Framework to establish the accounting standards in Australia for general purpose financial statements.

AASB Framework

The objectives of financial reporting are to show:

• Position - economic resources, financial structure, liquidity and solvency
• Performance - capacity to generate cash, how well invested funds are being used and capacity to grow
• Cash Flows - confirmation of cash generation

2. characteristics of useful information :-

a. Relevance

b. Reliability

c. Comparibility

d. Understandability

Constraints in accounting :-

Constraints accounting (CA) allow some variations generally accepted accounting principles(GAAP) when reporting financial statements of company and these variations do not violate the GAAP in light of recognised CA. CA contains explicit consideration of the role of constraints in accounting and constraints relate to limitations when providing financial information. The definition of a constraint is a regulation which belongs to prescribed bounds and there are four main types of constraints which are the cost-benefit relationship, materiality, Industry Practices and Conservatism,and these constraints are also accounting guidelines which border the hierarchy of qualitative information.

Types of Constraints :-

1. Material Constraint

2. Cost-benefit constraint