The Assessment of accounting & reporting practice on G.

G super
garment factory PLC

A senior project proposal submitted to the dep artment of Accounting for the
partial fulfillment of the requirements for the award of Bachelor of Art
(BA) Degree in Accounting

Rift Valley University

Bishoftu Campus
Department of Accounting
Advisor: Abera Belete

By:

Name Id No.

1. Eba Wane RVBADR/0224/08

2. Fayisa Teshome RVBADR/0026/08

3. Merga Mengistu RVBADR/0051/08

4. Rediet Yemenu RVBADR/0059/08

5. W/Michael Asfaw RVBADR/0070/08

February, 2018
Bishoftu, Ethiopia

Contents
Abstract 3

Chapter

1. Introduction 4

1.1 Background of the study 4

1.2 Statement of the problem 4

1.3 Objectives of the study 5

1.3.1 General Objective 5

1.3.1 Specific Objectives 5

1.4 Basic Research Questions 5

1.5 Significance of the Study 5

1.6 Scope of the study 5

2. Related Literature Review 6

2.1 Generally Accepted Accounting Principles 6

2.1.1 Basic Assumptions 6

2.1.2 Basic Principles 7

2.1.3 Constraints 8

2.2 The Accounting process 9

2.3 Recording business transactions and events 10

2.4 The cash and accrual basis of accounting 10

2.5 Double entry system 10

2.6 Accounting period 10

2.7 Accounting cycle 11

2.8 Conceptual Framework 12

2.9 Elements of Financial Statements 17

Page 2 of 25
3. Research Methodology 20

3.1 Research Design 20

3.2 Data type & its source 20

3.3 Sampling design and sample size 20

3.4 Methods of data collection 20

3.5 Data analysis method 20

10. Organization of the paper 21

11. Time schedule 20

12. Budget Schedule 20

13. References 21
 Abstract

The research is planned to be conducted by titling it “The assessment of accounting &

reporting practice on G.G super garment factory plc”. The research will be carried out to evaluate
the compliance of the management’s accounting and reporting practice with the prior established
principles and concepts. The study is proposed to be carried out with the general objective of
assessing the accounting and reporting practice of the business. Further the study will specifically
aim at assessing the verifiability and timeliness of the financial reports. It will also evaluate if the
management followed the accounting practice throughout its operation. The methodology section of
this proposal contains research design, data type, data source, sampling technique and data
collection technique. The study is classified as a mixed research, since it will possess combined
quantitative and qualitative data. Primary and secondary data will be used in compiling the data
needed for the research. The study is planned to be carried out with the purposive sampling method
of the non probability sampling techniques. Various data collection techniques will be applied in
completing the research. They are interview and questionnaire.
 Chapter One

1. Introduction

1.1. Background of the study

Users of accounting information such as owners, government, management, suppliers and creditors
need financial statements to help them in making timely and accurate decisions. The financial
statements could be used to evaluate the operating result and financial position of the firm and it is
the accountants that prepare these financial statements. These financial statements come in five types,
namely income statement, Balance sheet, capital statement, cash flow statement & Retained earnings
statement. The first four financial statements are prepared for every kind of business firms (i.e. sole
proprietorship, partnership, cooperative, joint venture and corporation). But the last one (retained
earnings statement) is prepared only for corporations. These financial statements are expected to
adhere to a standard which is accepted worldwide. Those standards are Generally Accepted
Accounting Principle (GAAP) and International Financial Reporting Standard (IFRS).

Income statement shows the financial performance of the business. It depicts the profit generated or
the loss incurred by the firm due to the operation it performs during the accounting period. The
capital statement shows the change in capital during the fiscal period. When the firm experiences
profit and when additional investment is introduced, the company’s capital will increase. In the
contrary net lose and withdrawal will reduce the capital of the concern. Cash flow statement shows
change in cash occurring due to operating, investing and financing activities. The change is calculated
by considering the inflows and outflows due to the above activities. Balance sheet shows the financial
position of a firm as of a specific date, usually the end of the fiscal year. It contains the asset, liability
and owner’s equity sections. Retained earnings statement shows the amount of the income retained by
a firm. A portion of the net income is distributed to the shareholders by paying them their dividend
and a portion of it is retained by the enterprise.

Users require financial reports to be trustworthy in order to process the information and make the
right decision. Otherwise they might face loss, if they base their decision on the wrong information.
So here is the part that the assessment of financial reports comes relevant.

The assessment will have two parts such that first to accumulate evidence about the information. Here
sufficiency and appropriateness of evidence needs to get into consideration. Sufficiency means
enough amount of the evidence and appropriateness pertains to the quality of the evidences.
Secondly, the research is planned to evaluate the information to determine the degree of
correspondence between the information and the established criteria. The established criteria is the
one mentioned above, which is GAAP and IFRS. (Arens, Elder and Beasley, 2002). The study is
intended to examine if the management of the firm perform their duty according what the accounting
practice demand.

1.2. Statement of the problem

The availability of financial reports help users of accounting information in their decision making
process. Governments need this information to impose tax on the firm. If this information is not
present, creditors, suppliers & owners may not be convinced to supply the firm with resources needed
to perform its operation. Certain audit procedures are going to be used to evaluate the accounting &
reporting practice of the business. The rationale behind conducting this research is to answer the
following questions.

 Did the management adhere to GAAP when preparing the financial report?

 Is the accounting cycle correctly and completely followed during the accounting period?

 Evaluating the recording of direct material cost, direct labor cost and overhead cost in discovering
the cost of a product?

1.3. Objectives of the Study

1.3.1. General Objective

The general objective of this study is to assess the accounting and reporting practice on G.G super
garment factory PLC.

1.3.2. Specific Objectives

The specific objectives of this research is

 To assess the verifiability and timeliness of the financial reports user

2018-02-14 05:16:39
05:15:55
--------------------------------------------
 To assess the internal control of the firm over its accounting & reportingTimeliness
practice –pertains
Verifiability means to
available
maintenance
to decisiof
on
audit trialsbefore
makers to information
it loses its
source
capacity to
 To examine if the accounting cycle were followed completely and sequentially
documents
influence their
thatdecisions.
can be checked
State for
financial information has less impact
accuracy.
than fresh information.
 To evaluate if the financial statements were prepared according to GAAP
1.4. Basic Research Questions

The basic research questions which will be used as a guideline in developing the questionnaire are:

 How strong is the internal control over its assets and different transactions?

 How did the management process the business transactions and events before attaining the final
outcome i.e., the financial statements?

 How committed is the management in complying with GAAP when preparing the financial
statements?

1.5. Significance of the Study

The need for conducting this study is for us to enhance our skill by applying the lesson we grasped in
the class in the practical world. Also this research can serve as a reference for those who want to
conduct studies on the manufacturing sector.

1.6. Scope of the study

The study will focus on the assessment of accounting and reporting practice on G.G super Garment
factory PLC. Specifically, it will analyze and present the application of GAAP, recording, reporting
practice and the internal control in G.G Super Garment factory Plc.

We’ve planned to carry out the research on G.G Super Garment factory located in Oromiya, Bishoftu,
wereda 02, kebele 01 behind Bishoftu Health Centre.
 CHAPTER TWO

Related Literature Review

2.1 Generally Accepted Accounting Principles

Accounting, as it is true for other disciplines, has got its own principles and practices. One must be
able to understand these principles and practices to understand and prepare financial statements and
reports. The principles and concepts used in accounting are called Generally Accepted Accounting
Principles (GAAP). These principles guide accountants on how to record and report business
activities. The main purpose of these basic rules is to guide accountants in measuring and reporting
financial events of business enterprises. The development of GAAP is not revolutionary rather
evolutionary. It is from research, practice, and pronouncements of professional bodies that GAAP
evolve. The accounting profession continues to use the concepts in Statement of Financial
Accounting Concepts (SFAC) Number 5 as operational guidelines. The concepts are classified as
basic assumptions, principles, and constraints. (Kieso, Weygandt, Warfield, 2013)

2.1.1Basic Assumptions

SFAC No. 5 addresses four basic environmental assumptions that significantly affect the recording,
measurement and reporting of accounting information. They are:

 Business Entity Assumption – Accounting deals with specific, identifiable business entities, each
considered an accounting unit separate and apart from its owners and from other entities. A
corporation and its stockholders are separate entities for accounting purposes. Also partnership and
sole proprietorships are treated as separate from their owners, although this separation does not hold
true in a legal sense. Under the business entity assumption, all accounting records and reports are
developed from the viewpoint of a single entity, whether it is a proprietorship, a partnership, or a
corporation. The assumption is that an individual’s transactions are distinguishable from those of the
business he or she might own. (Kieso, Weygandt, Warfield, 2013)

 Going Concern Assumption – under this assumption the business entity in question is expected not
to liquidate but to continue operations for the foreseeable future. That is, it will stay in business for a
period of time sufficient to carry out contemplated operations, contracts and commitments. This non
liquidation assumption provides a conceptual basis for many of the classifications used in account.
Assets and liabilities, for example, are classified as either current or long term on the basis of this
assumption. If continuity is not assumed, the distinction between current and long-term loses its
significance, all assets and liabilities become current. Continuity supports the measurement and
recording of assets and liabilities at historical cost. (Kieso, Weygandt, Warfield, 2013)

 Monetary Unit Assumption – It states that the results of a business’s economic activities are
reported in terms of a standard monetary unit throughout the financial statements. Money amounts
are the language of accounting – the common unit of measure (yardstick) enables dissimilar items,
such as the cost of a ton of coal and an account payable, to be aggregated into a single total. Example,
the unit of measure in the US is dollar; in Japan yen and Birr in Ethiopia. Unfortunately, the use of a
standard monetary unit for measurement purposes poses a dilemma unlike a yardstick, which is
always the same length, a currency experiences change in value. During periods of inflation
(deflation) dollars of different values are accounted for without regard to the fact that some have
greater purchasing power than others. (Kieso, Weygandt, Warfield, 2013)

 Time-period Assumption: The operating results of any business enterprise can’t be known with
certainty until the company has completed life span ceased doing business. In the meantime, external
decision makers require timely accounting information to satisfy their analytical needs. To meet their
needs, the time period assumption requires that changes in a business’s financial position be
reported over a series of shorter time periods. The time-period assumption recognizes both that
decision makers’ need timely financial information and that recognition of accruals and deferrals is
necessary for reporting accurate information. If a demand for periodic reports didn’t exist during the
life span of a business, accruals and deferrals would not be necessary. (Kieso, Weygandt, Warfield,
2013)

2.1.2 Basic Principles

In accounting four basic principles of accounting are used to record and report transactions. These
accounting principles assist in the recognition of revenue, expense, gain and loss items for financial
statement reporting purposes. Income is defined as revenues plus gains minus expenses and losses.
The cost principle, the revenue principle, and the matching principle are employed in practice in the
process of determining income. The four principles are (Kieso, Weygandt, Warfield, 2013)

 The cost principle: Normally applied in conjunction with asset acquisitions, the cost principle
specifies that the actual acquisition cost be used for initial accounting recognition purposes. The
cash-equivalent cost of an asset is used if the asset is acquired via some means other than cash. The
cost principle assumes that assets are acquired in business transactions conducted at arm’s length, that
is, transactions between a buyer and a seller at the fair value prevailing at the time of the transaction.
For non-cash transactions conducted at arm’s length the cost principle assumes that the market value
of the resources given up in a transaction provides reliable evidence for the valuation of the item
acquired. When an asset is acquired as a gift, in exchange for stock, or in an exchange of assets,
determining a realistic cost basis can be difficult. In these situations the cost principle requires that
the cost basis be based on the market value of the assets given up or the market value of the asset
received, which ever value is more reliably determined at the time of exchange. When an asset is
acquired with debt, such as with a note payable given in settlement for the purchase, the cost basis is
equal to the present value of the debt to be paid in the future. (Kieso, Weygandt, Warfield, 2013)

 The revenue realization principle: This principle requires the recognition and reporting of
revenues in accordance with accrual basis accounting principles. Applying the revenue principle
requires that all four of the recognition criteria i.e., definition, measurability, reliability and relevance
must be met. More generally, revenue is measured as the market value of the resources received or
the product or service given, whichever is the more reliably determinable. The revenue principle
pertains to accrual basis accounting, not to cash basis accounting. Furthermore, related expenses are
matched with these revenues. (Kieso, Weygandt, Warfield, 2013)

 The matching principle: Like the revenue principle, the matching principle is predicated on accrual
basis accounting, but matching refers to the recognition of expenses. The principle implies that all
expenses incurred in earning the revenue recognized for a period should be recognized during the
same period. If the revenue is carried over (deferred) for recognition to a future period, the related
expenses should also be carried over or deferred since they are incurred in earning that revenue.
Application of the matching principle require carrying on the books as asset outlays that under cash
basis accounting would be expensed at the time cash is disbursed. These expenditure for fixed assets,
materials, purchased services and the like that are used to earn future revenue. Only later, when the
revenue is recognized, would the asset accounts be expensed. In this way revenues and related
expenses would be matched across accounting period. (Kieso, Weygandt, Warfield, 2013)

 Full – Disclosure Principle: This principle stipulates that the financial statements report all
relevant information bearing on the economic affairs of a business enterprise. Many items, such as
executor contracts, fail to meet the recognition criteria but must still be disclosed for relevance and
complete reporting. Additionally, the full-disclosure principle stipulates that the primary objective is
to report the economic substance of a transaction rather than merely its form. This means that
substance should not be blurred by the way the transaction is presented. The aim of full disclosure is
to provide external users with the accounting information they need to make informed investment and
credit decisions. Full disclosure requires that the accounting policies followed be explained in the
notes to the financial statements. Accounting information may be reported in the body of the financial
statements, in disclosure notes to these statements, or in supplementary schedules and other
presentation formats for events that fail to meet the recognition criteria. (Kieso, Weygandt, Warfield,
2013)

 Objectivity Principle: This principle requires that entries in the accounting records and data
reported on financial statements be based on objectively determined evidence. This principle answers
the question why assets and services are recorded at cost rather than some other amount such as
estimated market value. As a rule, costs are objective since normally are established by buyers and
sellers, each striking the best possible bargain for themselves. If this principle is not followed, the
confidence of many users of financial statements could not be maintained. For example, objective
evidence such as invoice and vouchers for purchase, bank statements for the amount of cash in bank,
and physical counts for merchandise on hand supports much of the accounting. Such evidence is
completely objective and can be verified. Evidence is not always conclusively objective, for there are
many cases in accounting in which judgments, estimates, and other subjective factors must be taken
into account. In such situations, the most objective evidence available should be used. For example,
the provision for doubtful accounts is an estimate of the losses expected from failure to collect sales
made on account. The estimation of this amount should be based on such objective factors as past
experiences in collecting accounts receivable and reliable forecasts of future business activities. To
provide accounting reports that can be accepted with confidence, evidence should be developed that
will minimize the possibility of error, intentional bias, or fraud.

2.1.3 Constraints

Consistency in the application of accounting principles and uniformity of accounting practice within
the profession may not be achievable in all cases. Exceptions to GAAP are allowed in special
situations categorized according to four constraints: (Kieso, Weygandt, Warfield, 2013)

 Cost - Benefit Constraint: Underlying the cost - benefit constraint is the expectation that the
benefits derived by external users of financial statements should outweigh the costs incurred by the
preparers of the information. Although it is admittedly difficult to quantify these benefits and costs,
the FASB often attempts to obtain information from preparers on the costs of implementing a new
reporting requirement. It does not, however, try to estimate indirect costs, such as the cost of any
altered allocation of resources in the economy. The cost – benefit determination is essentially a
judgment call. (Kieso, Weygandt, Warfield, 2013)

 Materiality Constraint: Materiality is defined as “the magnitude of an omission or misstatement of

accounting that, in the light of surrounding circumstances, makes it probable that the judgment of a
reasonable person relying on the information would have been changed or influenced by the omission
or misstatement”. The materiality constraint is also called a threshold for recognition. The
assumption is that the omission or inclusion of immaterial facts is not likely to change or influence
the decision of a rational external user. However, the materiality threshold does not mean that small
items and amounts do not have to be accounted for or reported. For example, Fraud is an important
event regardless of the size of the amount. Materiality judgments are situation specific. An amount
considered immaterial in one situation might be material in another. The decision depends on the
nature of the item, its birr amount, and the relationship of the amount to the total amount of income,
expenses, assets, or liabilities, as the case may be. Because materiality matters tend to be case – by –
case judgments, the FASB has not specified general materiality guidelines. (Kieso, Weygandt,
Warfield, 2013)

 Industry Peculiarities: One of the overriding concerns of accounting is that the information in
financial statements be useful. The problem is that certain types of accounting information might be
critical for decision making in one industry setting but not in another. Basically, every industry has its
own way of doing things, its own business practices. Under the industry peculiarities constraint,
selective exceptions to GAAP are permitted, provided there is a clear precedent in the industry.
Precedent is based on the uniqueness of the situation, the usefulness of the information involved,
preference of substance over form, and any possible compromise of representational faithfulness.
(Kieso, Weygandt, Warfield, 2013)

 Conservatism: The conservatism constraint holds that when two alternative accounting methods
are acceptable and both equally satisfy the conceptual and implementation principles set out by the
FASB, alternative having the less favorable effect on net income or total assets is preferable. The
reasoning is that investors prefer information that doesn’t unnecessary raise expectations.
Conservatism assumes that when uncertainty exists, the users of financial statements are better served
by under – statement of net income and assets. Prime examples include valuing inventories at the
lower of cost or current market and minimizing the estimated service life and residual value of
depreciable assets. (Kieso, Weygandt, Warfield, 2013)
2.2 The Accounting Process

If the accounting process is to provide the users of accounting information with reliable, timely
reports, transactions during the accounting period must be recorded promptly and accurately. These
transactions should be classified, summarized and presented to users using financial statements.
These financial statements convey useful information to internal and external users. And both groups
of users make various types of decision using this information.

The accounting process can be described as a set of procedures used in identifying, recording,
classifying, and interpreting information related to the transactions and other events of a business
enterprise. The accounting process consists of three major parts:

1. The recording of transactions during an accounting

period 2. The summarizing of information at the end of the

period

3. The preparation of financial statements

2.3 Recording Business Transactions and events

Business transactions and other events cause changes in the assets, liabilities and owners’ equity of a
business enterprise. Transactions and events may be classified into two broad groups:

1. External transactions and events – exchange of resources and obligations between the
reporting firm and outside parties. Example could be purchase and sale of goods.

2. Internal events – events within the firm that affect its resources or obligations. Examples
are recognition of depreciation and amortization of long – lived assets, the recognition of
estimated doubtful accounts expense, and the use of inventory for production.

2.4. The cash basis of accounting & the accrual basis of accounting

Under the accrual basis of accounting revenues are reported in the income statement when they are
earned and expenses are reported in the income statement when they are incurred, without regard to
the timing of cash receipt or payment. But in cash basis of accounting of accounting revenue is
recorded only when cash is received and expenses are recorded only when cash is paid.

2.5 Double – Entry System

The standard accounting model for accumulated data in a business enterprise consists of the double –
entry system based on the basic accounting equation. Double – entry system is a system of accounting
in which each transaction effect is recorded in two or more accounts with equal debits and credits.
The double – entry system has various advantages:

1. It gives built – in controls that automatically call attention to many types of errors and after
assurance that once assets are recorded, they will not be forgotten or overlooked.

2. It facilitates the preparation of a complete set of financial statements as frequently as

desired.

2.6 Accounting Period

To be useful, information must reach decision makers frequently and promptly.

user Otherwise, problems
2018-02-11 03:13:14
can arise and opportunities can be missed while they wait for the information. To provide frequent
--------------------------------------------
SIMILAR TO TIME PERIOD
and prompt information, accounting systems are designed to produce periodic reports at regular
ASSUMPTION.
intervals. As a result, the accounting process is based on the time period principle. According to this
principle, an organization’s activities are identified with specific time periods, such as a month, a
quarter, or a year. Then, the financial statements or other reports are prepared for each accounting
period. The time periods covered by the reports are called accounting periods. Most organizations use
one year as their primary accounting period. As a result, they prepare annual financial statements.
However, nearly all organizations also prepare interim financial reports that cover one or three
months of activity.

The annual reporting period is not always the same as the calendar year ending December 31. In fact;
an organization can adopt a fiscal year consisting of any 12 consecutive months. Companies that do
not experience much seasonal variation in sales volume within the year often choose the calendar
year as their fiscal year. On the other hand, companies that experience major seasonal variations in
sales often choose a fiscal year that corresponds to their natural business year. The natural business
year ends when sales activities are at their lowest point during the year.

2.7 Accounting Cycle

The accounting cycle is a complete sequence of accounting procedures that are repeated in the same
order during each accounting period. The cycle includes the following steps:

1. Transactions are analyzed and recorded in the journal.

2. Classifying data by posting from the journal to the ledger.

3. Summarizing data from the ledger in an unadjusted trial balance.

4. Adjusting, correcting, and updating recorded data; completion of the worksheet.

5. Summarizing adjusted and corrected worksheet data in the form of financial statements.

6. Closing the accounting records to summarize the operations of the accounting period.

7. Preparation of a post – closing trial balance.

8. Reversing certain adjusting entries to facilitate the recording process in the subsequent accounting
period.

2.8 Conceptual Framework A conceptual framework is like a constitution. A conceptual framework

for financial accounting is “a coherent system of interrelated objectives and fundamentals that can
lead to consistent standards and that prescribes the nature, function, and limits of financial
accounting and financial statements.” In 1976, the FASB began to develop a conceptual framework
that would be a basis for setting accounting rules and for resolving financial reporting controversies.
The FASB has since issued seven Statements of Financial Accounting concepts (SFAC) that relate to
financial reporting for business enterprises. They are as follows. (Kieso, Weygandt, Warfield, 2013)

1. Statement of Financial Accounting Concepts No. 1 (SFAC No. 1), “objectives of Financial
Reporting by business Enterprises” presents the goals and purposes of Accounting (superseded by
SFAC No. 8, chapter 1)

2. SFAC No. 2, “Qualitative characteristics of Accounting Information” examines the characteristics

that make accounting information useful (superseded by SFAC No. 8, chapter 3).

3. SFAC No. 3, “Elements of Financial Statements of Business Enterprises” Provides definitions of

items that financial statements comprise, such as assets, liabilities, revenues and expenses
(superseded by SFAC No. 6).

4. SFAC No. 5, “Recognition and measurement in Financial Statements of Business Enterprises,” sets
forth fundamental recognition and measurement criteria and guidance on what information should be
formally incorporated into financial statements and when.

5. SFAC No. 6, “Elements of Financial statements,” replaces SFAC No. 3 and expands its scope to
include not-for-profit organizations.

6. SFAC No. 7, “Using Cash Flow Information and present Value in Accounting Measurements,”
provides a framework for using expected future cash flows and present values as a basis for
measurement.

7. SFAC No. 8, Chapter 1, “The Objective of General Purpose Financial Reporting,” and Chapter 3,
“Qualitative Characteristics of Useful Financial Information,” replaces SFAC No. 1 and No. 2.

These issues are discussed in three levels of conceptual framework.

First level: SFAC No. 1

Qualitative characteristics: SFAC No. 2

Second level

Elements of financial statements: SFAC No. 6

2.8.1 Third level: SFAC No. 5

The first level talks about the objectives of financial reporting and financial statements. The third
level explains about the recognition and measurement in financial statements of Business enterprises.

Between these two levels it is necessary to provide certain conceptual building blocks that explain the
qualitative characteristics of accounting information and define the elements that financial statements
comprise. These conceptual building blocks, i.e. second level: fundamental concepts, form bride
between the why (the objectives) and the how (recognition and measurement) of accounting.

1. Qualitative Characteristics of Accounting Information

Choosing an acceptable accounting method, the amount and type of information to be disclosed, and
the format in which information should be presented involves determining which of several possible
alternatives provide the best (i.e. most useful) information for decision – making purposes. Financial
reporting is concerned, in varying degrees, with decision making by financial statement users. As a
result, the overriding criterion by which accounting choices can be judged is that of decision
usefulness, that is, providing information that is most useful for decision making. To help distinguish
superior (more useful) form inferior, the qualitative characteristics, which make information useful,
should be considered. (Kieso, Weygandt, Warfield, 2013)

A. Decision makers (users) and Understandability

Information to be useful there must be a connection among it, the users and the decisions they make.
This linkage is the understandability of the information.

i. Primary Qualities

It is generally agreed that relevance and reliability are two primary qualities that make accounting
information useful for decision making.

A. Relevance: is the capacity of accounting information to make a difference to the external decision
makers who use financial reports. If certain information is disregarded because it is perceived to have
no bearing on a decision, it is irrelevant to that decision. Relevance can be evaluated according to
three qualitative criteria.

1. Timeliness – means available to decision makers before it loses its capacity to influence
their decisions. State financial information has less impact than fresh information.

2. Predictive value – Accounting information should be helpful to external decision makers by

increasing their ability to make predictions about the outcome of future events. For example,
 information about the current level and structure of asset holdings help users to assess the
entity’s ability to exploit opportunities and react to adverse situations.

3. Feedback value - Accounting information should be helpful to external decision makers

who are confirming past predictions or making updates, adjustments, or corrections to
predictions. (Kieso, Weygandt, Warfield, 2013)

B. Reliability – means that users can depend on accounting information to represent the underlying
economic conditions or events that it purports to represent. Reliability of information is a necessity
for individuals who have neither the time nor the expertise to evaluate the factual content of financial
statements. It is especially important to the independent audit process. Like relevance, reliability must
meet three qualitative criteria.

1. Representational faithfulness: - Accounting information should represent what it purports to

represent and should ensure that the selected method of measurement has been used without
error or bias. This attribute is sometimes called validity. Information must give a faithful
picture of the facts and circumstances involved. Accounting information must report the
economic substance of transactions, not just their form and surface appearance. (Kieso,
Weygandt, Warfield, 2013)

2. Verifiability: - Verifiability pertains to maintenance of audit trials to information source

documents that can be checked for accuracy. It also pertains to the existence of alternative
information sources as backing. Verification implies a consensus and implies that independent
measures using the same measurement methods would reach substantially the same
conclusions. (Kieso, Weygandt, Warfield, 2013)

3. Neutrality: - Accounting information must be free from bias regarding a particular

viewpoint, predetermined result, or particular party. Preparers of financial reports must not
attempt to induce a predetermined outcome or a particular mode of behavior (such as to
purchase a company’s stock). Accounting information can’t be selected to favor one set of
interested parties over another. It should be factual and truthful. (Kieso, Weygandt, Warfield,
2013)

ii. Secondary Qualities

The potential use of different acceptable methods by one enterprise in different years, or by
different companies in a given year, would make comparison of financial results difficult
 consequently, in order to enhance the usefulness of accounting reports, the qualities of
comparability and consistency are components of the conceptual framework. They are
considered to be secondary in our hierarchy to the qualities of relevance and reliability. If
information is to be useful, it must first be relevant and reliable, but achieving these primary
qualities may require foregoing the secondary qualities. Ideally, financial accounting
information would satisfy both qualitative levels. (Kieso, Weygandt, Warfield, 2013)

A. Comparability: - Information that has been measured and reported in a similar manner for different
enterprise in a given year, or for the same enterprise in different years, is considered comparable.
Thus, comparability is a characteristic of the r/ship b/n two pieces of information rather than of a
particular piece of information itself. Comparability enables to identify the real similarities and
differences in economic phenomena because these differences and similarities have not been
obscured by the use of non-comparable methods of accounting. (Kieso, Weygandt, Warfield, 2013)

B. Consistency: - This characteristic is achieved by an enterprise when it uses the same selected
accounting policies from period to period; that is, these methods are consistently applied. Consistency
results in enhancing the comparability of financial statements of an enterprise from year to year.
(Kieso, Weygandt, Warfield, 2013)

The amount and direction of change in net income and financial position from period to period is very
important to readers and may greatly influence their decisions. Therefore, interested person should be
able to assume that successive financial statements of an enterprise are consistently based on the same
generally accepted accounting principles. If the principles are not applied consistently, the trends
indicated could be the result of changes in the principles used rather than the result of changes in
business conditions or managerial effectiveness. (Kieso, Weygandt, Warfield, 2013)

Consistency principle requires that the same generally accepted accounting principles are used from
period to period for the same accounting events. Therefore, once an accounting method or principle is
adapted, it should be used for reasonable period of time. This is because accounting information is
more useful if it can be compared with similar information for the same company from time to time.
However, consistency principle does not prohibit switching from one accounting method to another.
Changes are permissible when it is believed that the uses of a different principle will more fairly state
net income and financial position. Examples of change in accounting principles include a change in
the method of inventory pricing, a change in depreciation method for previously recorded assets and a
change in the method of accounting long – term construction contracts. Consideration of changes in
accounting principles must be accompanied by consideration of the general rule for disclosure of such
changes, which is as follows: (Kieso, Weygandt, Warfield, 2013)

The nature of and justification for a change in accounting principle and its effects on income should
be disclosed in the financial statements of the period in which the change is made. The justification
for the change should explain clearly why the newly adopted accounting principle is preferable.

There are various methods of reporting the effect of a change in accounting principle on net income.
The cumulative effective of the change on net income may be reported on the income statement of the
period in which the change is adopted. In some cases the effect of the change could be applied
retroactively to past periods by presenting revised income statements for the earlier years affected.

The application of the consistency principle does not require that a specific method be used uniformly
throughout an enterprise. For example, it is not unusual for large enterprises to use different costing
methods and pricing methods for different segments of their inventories. (Kieso, Weygandt, Warfield,
2013)

2.9 Elements of Financial statements

SFAC No. 6 defines 10 elements of financial statements (Kieso, Weygandt, Warfield, 2013)

Assets – are probable future economic benefits obtained or controlled by a particular entity as a result
of past transactions or events.

Liabilities – are probable future sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in the future as result of past
transactions or events.

Equity – is the residual (ownership) interest in the assets of an entity that remains after deducting its
liabilities. While equity in total is a residual, it includes specific categories of items, for example,
types of share capital, contributed surplus and retained earnings.

Investment by owners: - are increases in net assets of a particular enterprise resulting from transfers to
it from other entities of something of value to obtain or increase ownership interests (or equity) in it.

Distributions to owners: - are decreases in net assets of a particular enterprise resulting from
transferring assets, rendering services, or incurring liabilities by the enterprise to owners.
Revenues: - are inflows or other enhancements of assets of an entity or settlement of its liabilities (or
combination of both) during a period from delivering or producing goods, rendering services, or other
activities that constitute the entity’s ongoing major or central operations.

Expenses: are outflows or other using up of assets or incurrence of liabilities (or combination of both)
during a period form delivering or producing goods, rendering services, carrying out other activities
that constitute the entities ongoing major or central operations.

Gains: - Gains are increases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity during a
period except those that result from revenues or investments by owners.

Losses: - are decreases in equity (net assets) from peripheral or incidental transactions of an entity
and from all other transactions and other events and circumstances affecting the entity during a period
except those that result from expenses or distributions to owners.

Comprehensive Income: is change in equity (net assets) of an entity during a period from transactions
and other events and circumstances from non owner sources, i.e. change in equity other than resulting
from investment by owners and distribution to owners. The FASB’s new comprehensive income
incorporates certain gains and losses in its computation that are not currently included in net income
capital transactions are still excluded.

Direct Material Cost (DMC): Material used during the production process of a job and identified with
the jobs is the direct material. The cost of such material consumed is the direct material cost. DMC is
identifiable with the job and is charged directly. The source document for ascertaining this cost is the
material requisition slip from which the quantity of material consumed can be worked out. Cost of the
same can be worked out according to any method of pricing of the issues like FIFO, LIFO or average
method as per the policy of the organization. The actual material cost can be compared with standard
cost to find out any variations between the two. However, as each job may be different from the
other, standardization is difficult but efforts can be made for the same. (The Institute of Cost
accountants of India, 2012)

Direct Labor Cost: This cost is also identifiable with a particular job and can be worked out with the
help of ‘Job Time Tickets’ which is a record of time spent by a worker on a particular job. The ‘job
time ticket’ has the record of starting time and completion time of the job and the time required for
the job can be worked out easily from the same. Calculation of wages can be done by multiplying the
time spent by the hourly rate. Here also standards can be set for the time as well as the rate so that
comparison between the standard cost and actual cost can be very useful. (The Institute of Cost
accountants of India, 2012)

Direct Expenses: Direct expenses are chargeable directly to the concerned job. The invoices or any
other document can be marked with the number of job and thus the amount of direct expenses can be
ascertained. (The Institute of Cost accountants of India, 2012)

Overheads: This is really a challenging task as the overheads are all indirect expenses incurred for the
job. Because of their, overheads cannot be identified with the job and so they are apportioned to a
particular job on some suitable basis. Predetermined rates of absorption of overheads are generally
used for charging the overheads. This is done on the basis of the budgeted data. If the predetermined
rates are used, under/over absorption of overheads is inevitable and hence rectification of the same
becomes necessary. (The Institute of Cost accountants of India, 2012)

Work in progress (WIP): On the completion of a job, the total cost is worked out by adding the
overhead expenses in the direct cost. In other word, the overheads are added to the prime cost. The
cost sheet is then marked as ‘completed’ and proper entries are made in the finished goods ledger. If a
job remains incomplete at the end of an accounting period, the total cost incurred on the same
becomes the cost of WIP. The WIP at the end of the accounting period becomes the closing WIP and
the same becomes the opening WIP at the beginning of the next accounting period. A separate
account WIP is maintained. (The Institute of Cost accountants of India, 2012)
 Chapter Three

3. Research Methodology

3.1. Research Design

Using approach as a base of classification, our research will fall under the category of mixed research,
i.e. possess quantitative & qualitative data. The rationale for classifying in this way is that, the
research will have a quantitative feature as it will base its conclusion on numerical data and has a
nature of objectivity. Also the existence of subjectivity, for some decisions which cannot be done
objectively, and usage of open ended questions will make the research has a qualitative research
attribute.

3.2. Data type and its Sources

Primary and secondary data will be used in compiling the research. Primary data include the
information that will be collected using questionnaire and interview. The secondary will consist of the
different financial reports, websites and books referred to complete the task.

3.4. Sample design & Sample size

The research is proposed to be conducted using the purposive sampling, among the various non
probability sampling techniques. The rationale behind selecting this method is that this sampling
method will help us select our participants that will meet our objective. The sample size will depend
on the knowhow and experience of the participants.

3.5. Methods of data collection

Among the various data collection techniques interview and questionnaire will be used. From
interview method, specifically, face to face method and the semi-structured will be used. And among
the various questionnaire types, we’ve proposed to use the mixed type, as it consists both the closed
ended question and open ended questions.

3.6. Data Analysis method

This section states the procedures to be followed when conducting the proposed research. Once the
data are captured from the two proposed sources, then data analysis will be followed to make the raw
data ready for interpretation and report writing. But before conducting the analysis, editing and
checking of the raw data for any errors and omissions will be carried out. Then after the completion
of edit, analysis, interpretation and discussion of data will follow. A chart will be used in the paper in
the analysis of the data. Finally, a sequential and systematic report that forward recommendation to
some of the company’s accounting irregularities (if any) will be prepared for presentation.

Organization of the paper

The research paper will be an integration of five chapters. The first chapter is with a title introduction.
The second chapter will briefly elaborate literature reviewed in the preparation of the paper. The third
chapter is research design and methodology. Chapter four is data analysis and interpretation. The last
chapter, i.e. chapter 5 is titled as Conclusion and recommendation.

Time Schedule

Activities Oct Nov Dec Jan Feb Mar Apr May Jun
Topic Selection X
Literature review X
Data collection X
Data analysis & X
interpretation
Conclusion and X
Recommendation
Final paper X
submission
Budget Schedule

Item Quantity Unit Price Total Cost

Personal cost
Travel expense 3 trip Br. 20/trip 60
Material Cost
Paper 100 sheets Br. 0.50 50
Pen 1 5 5
Printing & copying expense 25 250
CD 2 Br. 25 50
Total Br.415

References

Donald, E., Jerry, J., Terry, D. (2013). Intermediate Accounting. [On line] Available
http://www.quantumsimulations.com

Amir, D., Jayavel, S., (2002). Complete Business Statistics. USA: Brent Gordon

Ray, W., Kurt, P., (2001). Principle of Auditing & other assurance services. MC Graw – Hill Irwin

The Institute of cost accountants of India (2012). Cost and management accounting. Kolkata: Repro
India Limited.