Week 5 Tutorial Questions

Refer to Deegan Chapter 6

PART A
Questions:
6.7- In words and figures, financial reports describe economic events. Financial data must not
only reflect important phenomena, but must also correctly represent the phenomena they
claim to represent in order to be useful. A representation would have three properties to be a
completely true representation. It would be flawless, neutral and error free. Of course,
perfection is difficult, if not impossible, to achieve. Hence financial information’s that are to be
presented are of faithful representation and neutral from virus.
6.10- The term "relevance" in accounting refers to how important something is to a decision
maker. User decisions can be influenced by the availability of relevant information. Whether it
has a predictive value, a confirmatory value or both, it can make a difference in judgments.
Users can use predictive value to predict or anticipate future results. Users can use the
confirmation value to verify and validate previous predictions or judgments. An accurate
description is essential. Financial reports are written and numerical representation are made
with faithful representation. Financial data in financial reports must accurately reflect what
they claim to represent. In other words, it should represent what is really present / happening.
6.17- A conceptual framework establishes guidelines on what the accounting objectives should
be, what qualitative characteristics the general financial information should have, how the
accounting components should be defined and recognized, and how the accounting
components should be monitored. As conceptual framework are based on normative theory it
is not the best practice to solve the management issues.
6.25- Financial reports are designed for people who have a reasonable understanding of
economic and business activity and who study and analyze data in depth. Even well-informed
and attentive users may sometimes need the assistance of a consultant to understand
information relating to difficult financial problems. Current and future investors, lenders and
other creditors have the most urgent and immediate need for financial reporting information,
and many cannot expect the company to provide it directly to them.
PART B (from Semester 2, 2020 MST)
i. Prudence is described as the use of attention when making decisions in unclear situations.
Another distinction is that faithful representation refers to a representation of the essence
of an economic phenomenon and not just its legal form.
ii. Financial reports are written and numerical representations of economic events. Not only
must financial data be relevant, but it must also adequately represent the phenomena they
intend to describe in order to be useful. Faithful representation refers to the description of
the essence of an economic phenomenon and not only to its legal form. Integrity, neutrality
and absence of errors are the fundamental properties of a faithful representation.
iii. The principle of conservatism is the basis for the lower cost or market rule, which states that
inventory should be recorded at the lower of its purchase cost or current market value. The
reduction of taxable income and tax revenue results from this procedure. The Conservative
 Principle of Accounting is only a guide that an accountant should follow in order to maintain
a clear picture of the financial condition of a business. Hence the concept of conservatism is
also known as prudence. The example in this scenario is prudence.
iv. Prudence is about making the right decisions when dealing with uncertain issues, such as
debt provisions, assets and dubious estimates. Consequently, the highest probable loss
value and the lowest possible amount of profit will be included in the financial statements.
This improves the quality of the data by allowing comparison and allowing a third party to
accurately analyze the company's financial condition, performance, and any changes. This
notion, however, can be disproved because if accountants are "too" cautious, the
responsibilities can be exaggerated or exaggerated, alienating potential investors because
the information is no longer credible. Another argument against the effectiveness of
prudence in accounting is that it contradicts another crucial accounting concept,
competence. The accrual principle emphasizes that income and costs must be recognized as
soon as they are recognized, regardless of whether or not money has been paid. Prudence,
on the other hand, emphasizes documenting transactions only when the money is
guaranteed. Depending on the framework, the type and materiality of the information
influence its importance. If some statistics were excluded, they could have a large-scale
impact on decision making, leading people to place greater value on accumulations, as they
are perceived as more complete and, ultimately, more reliable.
v. Prudence should be reinstated in the views of investors since it is the overarching
accounting concept that ensures capital and performance are not exaggerated. Everyone
should be able to see the breakdown of realized and unrealized revenue.