Question Tag: Accounting Information

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  • 1 Marks

FA – MAY 2015 – L1 – SA – Q12 – Recording Financial Transactions (Including Source Documents, Books of Prime Entry, and Cash Books)

Identify the origin of accounting information in financial records

Which of the following provides the origin of accounting information?
A. Accounting books
B. Source documents
C. Ledger
D. Cash book
E. Subsidiary book

Answer: B
Explanation:
Source documents such as invoices, receipts, and vouchers are the primary origin of accounting information, as they record the initial transactions before they are transferred to accounting books.

  • 10 Marks

FA – Nov 2023 – L1 – Q1a – The IASB’s Conceptual Framework

Explain the key qualitative characteristics of useful accounting information according to the IASB's Conceptual Framework.

Explain each of the following characteristics of useful accounting information:
i) Relevance (2 marks)
ii) Understandability (2 marks)
iii) Materiality (2 marks)
iv) Completeness (2 marks)
v) Neutrality (2 marks)

i) Relevance:
This is defined as capable of making a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. Predictive value consists of the capability of being used as an input in processes or models used to predict future outcomes. Confirmatory value exists when the information provides feedback about earlier estimations. The relevance of information depends on its materiality since only material information is considered relevant.

ii) Understandability:
An essential quality of the information provided in financial reports is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting. Classifying, characterizing, and presenting information clearly and concisely makes it understandable.

iii) Materiality:
Information is material if omitting or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity’s financial report. For example, a large supermarket omitting expenses of GHȼ1,500 would not be material to them but would be to a small local shop.

iv) Completeness:
Completeness means that the depiction will include all the information, including descriptions and explanations, necessary for a user to understand the phenomenon. Omission of any information can lead to unreliability. Therefore, the more complete the information the better, but weigh against the costs of time and money needed to prepare full information. For example, if the omission of a particular asset would lead to incomplete and therefore unreliable information, the effect of having unreliable information must be weighed against the costs and time involved in the inclusion of the asset.

v) Neutrality:
Neutrality is obtained when a depiction is without bias in the selection or presentation of financial information. In other words, it is not manipulated in order to present a favorable or unfavorable depiction of an economic phenomenon. Financial statements are not neutral if a particular selection or presentation of information influences the user’s decision. Competent individuals working independently should arrive at the same or very similar measures of given economic events or situations. For example, a provision for bad debts must be based on some evidence and not the biased view of the preparer of the financial statements.

  • 20 Marks

FA – May 2016 – L1 – Q7 – The IASB’s Conceptual Framework

Identify users of financial statements and explain their needs, and discuss qualitative characteristics of financial information.

(a) Identify any FOUR users of financial statements and explain their needs for accounting information. (8 marks)
(b) The conceptual framework of accounting recognizes qualitative characteristics of financial information that is useful for decision-making.

Required:
Identify and explain FOUR qualitative characteristics of financial information recognized by the conceptual framework. (12 marks)

(a) Users of Financial Statements and Their Needs

  1. Investors: They provide risk capital, primarily as shareholders, and are concerned with the risk and return associated with their investment. Investors need information to decide whether to buy, hold, or sell shares and assess the company’s ability to pay dividends.
  2. Employees: Employees and their representatives are interested in the company’s stability and profitability. They need information to evaluate the likelihood of continued employment, potential for salary increases, retirement benefits, and career advancement opportunities.
  3. Lenders: This group includes banks, debenture holders, and other financial institutions. They require information to assess the company’s ability to repay loans and the interest due, thus determining the creditworthiness of the business.
  4. Suppliers and Trade Payables: Suppliers need to know if they will be paid on time and the company’s ongoing viability as a customer. This group is interested in information that can help them assess the company’s liquidity and credit risk.

(b) Qualitative Characteristics of Financial Information

  1. Understandability: Financial information should be presented clearly and concisely, making it accessible to users with reasonable knowledge of business and economic activities. The goal is to ensure that users can comprehend the information provided without unnecessary complexity.
  2. Relevance: Relevant information is capable of influencing users’ economic decisions by helping them evaluate past, present, or future events or confirm, or correct, their past evaluations. It includes materiality, which refers to the significance of information to decision-making.
  3. Reliability/Faithful Representation: Information is reliable when it is free from material error and bias, representing faithfully what it purports to depict. Reliable information is essential for users to trust the accuracy and integrity of financial reports.
  4. Comparability: Users must be able to compare the financial statements of an entity over time and with those of other entities. Comparability helps users identify trends and differences, thus supporting more informed decision-making.

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