Question 1.

Regulatory framework

Regulatory framework is based on: company law, accounting standards, international

accounting standards, other national standard setting bodies and stock exchange requirements.
Company law is based on companies act 1985. Some accounting principles are embodied in
law, other are regulated by accounting standards. Accounting standards are rules or set of
rules prescribing the methods by which accounts (financial statements) should be prepared
and presented. These are working regulations and are issued by national or international body
of the accounting profession. Accounting standards interact with companies law: final
accounts (financial statements). Stock exchange insists on member organizations following
accounting standards: failure to comply with accounting standards will lead to auditors
changing and qualifying their respond.

Conceptual framework

Framework of accounting, conceptual framework, is a constitution, a coherent system of

interrelated objectives and fundamentals that can lead to consisted accounting standards and
that prescribes the nature, function and limits of financial accounting and financial statements.
It avoids fire fighting in SSAP approach and aims to develop underlying phylosophy as basis
for consistent accounting principles so each SSAP/FRS is structured into whole framework. A
lot of work on conceptual framework carried out – by IASCs framework for preparing and
presentation of financial statement 1989.

IASC’s framework is not mandatory and deals with: objectives of financial statement,
qualitative characteristics that decide usefuleness on information in financial statements,
definition, recognition and measurement of elements from which financial standards are built,
concepts of capital and capital maintainance. IASC believe international harmonization of
accouting methids possible by focusing on above.

Disadvantages

Financial statements intended for variety of users and may not be possible to devise
single conceptual framework suiting all users.
May need variety of accounting standards each produced for different purpose.

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Question 2.

Objective of financial statements

Financial statements should provide information about the financial position, performance and
changes in the financial position of an entity that is useful to a wide range of users in making
economic decisions. In order to achieve this objective, financial statements are prepared on
the basis of a number of established concepts and assumptions and must adhere to the rules
and procedures set down in accounting standards.

If it had always been the custom to draft different financial statements for different purposes,
so that one version was given to a banker, another to someone wishing to buy the business,
then accounting would be very different from what it is today. However this has not occured.
Identical copies of the financial statements are given to all the different external stakeholders,
irrespective of why they wish to look at them. This means that the banker, the prospective
buyer of the business, shareholders all see the same income statement and balance sheet.

Keeping the income statements and balance sheets according to certain rules and standards is
the purpose of accounting framework. Because everyone recieves the same income statement
and balance sheet, in order to be of any use all the various stakeholders have to believe that
the assumptions upon which theses financial statements are based are valid and appropriate. If
they don't, they won't trust the financial statements.

Question 3.

Five main users of financial information are:

1. Managers
2. Owners
3. The bank
4. Tax inspectors
5. A prospective buyer/Investors

Managers are the day to day decision makers. They need to know how well things are
progressing financially and about the financial status of the business. This information is
crucial to their decision making and can affect current and future budgeting and investing
processes.

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Owners of the business and/or shareholders want to be able to see whether or not the business
is profitable. In addition they want to know what the financial resources of business are. Other
than that, owners and/or shaleholders may use this information in order to decide how to raise
money or capital, wether to change status of the company (merger, cessation, bankruptcy
procedure, liquidation procedure…)

The bank needs financial information about the company if the owner wants to borrow money
for use in the business. This information will show them ability of the owner to pay the debt
and interest rate. Banks are specially focused on the net profit/loss of the company, liquidity,
cash flow statement.

Tax inspectors need financial information on the companies profit in order to calculate the
taxes payable.

Prospective buyers/Investors need financial information in order to decide wether or not to

buy the company or invest in its operations. They want to have an insight on the income
statement, cash flow statement and balance sheet information.

Question 4.

Qualitative characteristics of financial statements

These are the attributes that make the information provided in financial statements useful to
users. There are four principal qualitative characteristics: understability, relevance, reliability
and comparability.

Understability

Information in financial statements should be readily understandable by users.

Relevance

Information in financial statements must be relevant to the decision-making needs of users.

To be relevant, information must influence the economic decisions of users by helping them
evaluate past, present or future events or confirming, or correcting, their past evaluation.

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Materiality

Information is material if its omission or misstatement could influence the economic decision
of users. Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement.

Reliability

To be useful, information must also be reliable. To be reliable, information must be free from
material error and bias.

Faithfull representation

A balance sheet should represent faithfully the transactions and other events that result in
assets, liabilities and equity of the entity at the reporting date.

Substance over form

Transactions and other events must be accounted for and presented in accordance with their
substance and economic reality and not merely their legal form. This is reffered to as
substance over form. The legal form of transatcion can differ from its real suvstance. There
this happens accounting should show the transaction in accordance with its real substance
which is, basically, how the transaction affects the economic situation of the business. This
means that accounting in this instance will not reflect the exact legal position concerning that
transaction.

Neutrality

Information if financial statements must be free of bias.

Prudence

This is the inclusion of a degree of caution in the exercies of the judgement needed in making
the estimates required under conditions of uncertainty. For example decisions relating to the
bad debs and allowances for doubtful debts, such that assets and income are not overstated
and liabilities and expenses are not understated. It is the accountant's duty to see that people
get the proper facts about a business. The accountatnt should make certain that assests are not
valued too highly. Similarly, liabilities should not be shown at values at values that are too
low.

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Completeness

To be reliable information in financial statements must be complete within the bounds of

materiality and cost.

Comparability
The measurement and display of the financial effect of similar transatcions and other evenets
must be done in a consistent way throuhgout an entity and over time for that entity, and in a
consistent way for different entities. Users must be informed of the accounting policies used
in the preparaion of the financial statements. Financial statements must include corresponding
information for the preceding periods.

Question 5.

Materiality

Everything that apperas in a financial accounting statement should be material. That is, it
should be of interest to the stakeholders, those people who make use of financial accounting
statements.

Accounting does not serve a useful puropse if the effort of recording a transaction in a certain
way is not worthwile. Time should not be wasted for recording trivial things.

Businesses fix all sorts of arbitraty rules to determine what is material and what is not. There
is no law that lays down what these should be – the decision as to what is material and what is
not is dependent upon judgement. Different limits may be set for different types of item.

Going concern

Going concern is the idea that a company will continue to operate indefinitely, and will not go
out of business and liquidate its assets. For this to happen, the company must be able to
generate and/or raise enough resources to stay operational.

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Accrual basis of accounting

Under the accrual basis accounting, revenues and expenses are recognized as follows:

Revenue is recognized when both of the following conditions are met:

   a. Revenue is earned.
   b. Revenue is realized or realizable.

Revenue is earned when products are delivered or services are provided. Realized means cash
is received. Expense is recognized in the period in which related revenue is recognized.

Entity

A clearly defined economics unit that is accounted for separately. An accounting entity can be
either a business or subdivision of a business that engages in economic activities, has
economic assets and resources that must be accounted, and is separate from the personal
dealings of its owners.

Money measurement concept

 Only financial transactions are recorded

 Non-financial data are ignored

 Qualitative information are ignored

 Money measure at the time of transaction, no allowance for

changing price level

 This concept ignores important economic information

Financial statements will not generate qualitative, economic and non financial information. At
times, this limitation might pose a disdvantage to the users of the financial statement like the
investors, funds managers, suppliers and others.

Resources
Books:

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  Albrecht, Stice, Swain, Ph.D., W.A, E.S, J.S, R.S, 2010. Accounting concepts and

framework. 2nd ed. USA, Michigan: Cengage learning.

 Wood & Sangster, F.W&A.S, 2008. Business Accounting 1. 11th ed. Edinburgh:

Pearson Education Ltd.

WWW:

 The global body for professional accountants. 2011. ACCA. [ONLINE] Available at:

http://www.accaglobal.com/. [Accessed 16 March 11].

 Regulatory Framework of Accounting. 2011. ACCA. [ONLINE] Available at:

http://www.scribd.com/doc/36665028/The-Regulatory-Framework-of-

Accounting. [Accessed 18 March 11].

 Information purposes. 2009. Financial Accounting. [ONLINE] Available at:

http://nces.ed.gov/pubs2004/h2r2/ch_2.asp. [Accessed 22 March 11].

 Financial statements. 2011. Users of financial statements. [ONLINE] Available at:

http://www.essays.se/about/users+of+financial+information/. [Accessed 20

March 11].

 White papers. 2011. Accounting today. [ONLINE] Available at:

http://www.accountingtoday.com/global/current-issues.html.

[Accessed 23 March 11].

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