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Financial Accounting Theory Oz Assignments
The body of correlated goals and principles are called as Conceptual framework. It means goals identifies the objectives and the resolution of financial reporting whereas principles are primary concepts that supports in achieving goals and purposes (Deloitte, 2018). These concepts help in selecting the transactions, events or circumstances which requires accounting and also provide the method for computing and reporting and summarizing. Further as per Financial accounting standards board, conceptual framework helps International Accounting Standard Board (IASB) in emerging and reviewing international business concept which are founded on reliable concepts and also help preparers to develop accounting policies and recognition criteria for incomes, expenses, assets and liabilities that are not covered by an accounting standard (Deloitte, 2018) and lastly it also helps in understanding and interpreting IFRS. Hence, in simple words, conceptual framework makes the accounting information useful and assist in recognising, measuring and reporting the same in financial statements.
As discussed above, Conceptual framework is a combination of objectives and fundamentals where goals and purposes of financial reporting are recognized and help or guide in attaining those goals and purposes (Deloitte, 2018). There are many reasons for the requirement of conceptual framework such as:
- Conceptual framework provides a set of joint premises for a discussion in order to solve multifarious reporting and accounting concepts.
- Conceptual framework helps in measurement.
- Conceptual framework helps in appropriate revelations and presentations.
- It also helps in addressing general purpose financial management.
- Conceptual framework also reports the concepts of capital maintenance (Deloitte, 2018).
- Reporting entity are also addressed by conceptual framework.
- Beneficial fiscal facts is addressed by framework.
- Recognition or de-recognition of any information is also addressed by conceptual framework.
- Information about usage of entity’s economic resources are also addressed by conceptual framework (Deloitte, 2018).
The objectives of financial reporting are as follows:
- The chief objective of financial reporting is to provide valuable information to the users of the financial statements. The users of financial statements are those who are directly or indirectly associated with the entity (FASB, 2018). The examples are creditors, banking departments, taxation authorities, government agencies, customers, creditors, investors etc.
- The financial reporting only includes information which are comprehensible or logical. In other words, only that information must be included in financial reporting that are essentials about the business and must not be burdened with un-necessary data (FASB, 2018).
- The financial reporting must contain accurate and complete information in order work competent capital market place.
- In order to predict or anticipate prospect cash flows, there should a proper revelation of economic resources or the commitments or any deviations in liabilities of an entity (FASB, 2018).
- Information about the company’s liquidity position is very critical and it is used to assess whether the entity is continuing as a going concern.
- With the financial reporting, it is very easy to compute the key financial ratios of the entity (FASB, 2018).
These are those set of accounting principles, procedures and standards which are required by the company in order to assemble financial statements (Deloitte, 2018). From these accepted principles transparency of the statement of financial information is enhance The essential characteristics of generally accepted accounting principles are discussed below:
- It ensures the minimum level of consistency in financial statements of an entity which makes its tranquil to the investors to extract and evaluate the valuable information management.
- Comparison of entity’s performance with various companies is also possible with the help of generally accepted accounting principles.
- Financial statements must abide by the generally accepted accounting principles for the purpose of public disclosures.
- Those companies follow Generally accepted accounting principles can value inventories on the basis of LIFO method.
The following are qualitative characteristics of financial reporting:
- Relevance: All the information mentioned in financial statements must be relevant. In other words, the information provided in the financial statements must be proficient of creating a difference in judgements made by the users of financial statements. For an instance, if there is a decision to replace an asset then its acquisition cost is not relevant or useful in making a decision to replace an asset. The relevant or useful information in this case should be cost of new asset (Deloitte, 2018).
- Timeliness: Financial statements must be reported in a timely manner. This statement further elaborated by stating that financial statements must be published to the users of financial statements within few weeks’ after the end of accounting period otherwise the financial statements will have no relevance.
- Materiality: Financial statements must report material information which can influence the decisions of the users of financial statements (Deloitte, 2018).
- Faithful representation: The Financial reports represent financial occurrences in numbers and words. Thus, the financial information presented in the marketing management reports should signify what is important to exemplify (Deloitte, 2018).
- Completeness: Another qualitative characteristics of financial reporting is that it embraces all necessary descriptions and justifications.
- Neutrality: Financial statements must present true and fair view of company financials. The information should not be influenced in order to change the decision of users.
- Comparability: The financial statements must be comparable from one accounting period to another.
- Understandability: Last but not the least, company's financial information should be presented in such a way that a person with a reasonable understanding of business should be able to understand it (Deloitte, 2018).
The basic assumptions used in accounting are business entity assumption, going concern assumption, accounting period assumption and money measurement assumption (Deloitte, 2018). These are elaborated as follows:
- In Business unit assumption, the business is treated as single unit or entity.
- In Money measurement assumption, all those events which can be expressed in money terms is recorded in books of accounts.
- In going concern assumption, it is assumed that entity is enduring in operation in foreseeable future.
- In Accounting period assumption, it is assumed that financial life of an entity is theatrically divided into periodic intervals.
1. FASB, 2018, The conceptual framework, viewed on 26 September 2018 from https://www.fasb.org/jsp/FASB/
2. Deloitte, 2018, Conceptual Framework for Financial Reporting 2018, viewed on 26 September 2018 from https://www.iasplus.com/en/standards/other/framework.