Samuel Eddy 1506734 ACCTN101

Question 1. Discuss the importance of accounting standards for financial reporting purposes.

Accounting Standards provide a framework when financial reporting is done. It creates a set of rules
that allow entities to choose correct information to be reported and correctly classify that
information appropriately for reporting allowing information to be communicated in a meaningful,
consistent and in a way that can be understood by the users.

Question 8. Explain the concept of depreciation and why organisations need too recognise
depreciation expense in the income statement.

Depreciation is the systematic allocation of the depreciable amount over an item’s useful life time. It
is important to recognise depreciation in the income statement because as any asset is use it can
become old, obsolete or become out dated by technology which lowers the value of the item. So in
being prudent when reporting depreciation must be shown as an expense to recognise the decrease
value of the asset and ensure that they are not being overstate in the financial statements.

Question 9. Explain, using an example of an asset, how different organisation may use different
depreciation methods to recognise the allocation of depreciation expense in the Income Statement.

There are 3 different ways to record depreciation, straight line method, diminishing value, and units
of use. If we look at a Kayak hire shop and their asset of Kayaks, they would be depreciated by the
units of use method. This is because when the kayaks are not being hired out, they kayaks are not
losing any value. But if we look at the Kayak hire shops work Van, this would be depreciated using
the straight-line method, as van will lose value based on how old they are, consistently decreasing in
value over the years

Question 10. Discuss why it is important for an organisation to have clear definitions of the elements
that are to be reported in the financial statements. Also discuss why it is important that the
organisation is able to classify these financial elements into sperate categories.

If a organisation did not have clear definitions then when they tried to create their financial
statements it would not show and fair, true or accurate view of what has actually gone on in the
organisation over the current accounting period. But if they are given a clear set of rules as this has
to be classified as this, then it creates a similarity between all entities allowing them to compare
financial statements between businesses, and it also creates a sense of accuracy in the statements
as they will have all been prepared under the same set of rules and guidelines.

Question 16. Consider situations, and state what financial statement would help decision makers
make a decision. And Why.

a) Income Statement, cash flow and Statement of Financial position. Because in the income
statement and cash flow because they can see how much revenue is coming into the
business and how much if left to pay for future expenses or liabilities. Statement of Financial
Samuel Eddy 1506734 ACCTN101

position because it shows how much debt they have going out in the next 30 days under
accounts payable
b) Statement of comprehensive income and Statement in Changes of Equity. Statement of
comprehensive Income because it shows how much profit the company is making and how
much could be paid out the shareholders. The Statement in changes of equity because if
shows how much is being paid out to the different types of shareholders currently.
c) Look at their income statement and balance sheet. Income Statement they would be able to
see the profits the business is currently making and in the statement of financial position
they would be able to how many assets the small business has because if they fail to repay
the loan do, they have enough assets to sell off in order to pay of the loan in full.
d) Cash Flow statement. In the cash flow statement, we see all cash in and outflows for the
reporting period, so at the end we see a net surplus or deficit of cash flow and this is what
you could look at to see if there is enough cash flow to pay shareholders but still reinvest
e) Statement of Accounting Policies. As this will contain any nonfinancial information for users
to read and find which is where anything about pollution would be found as it does not have
a financial value, unless there was a court case coming up and there could be a possible pay
out for damages done this would need to be disclosed in the financial statements.