Topic 1 - Accounting Policy Decisions Flashcards Preview

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Flashcards in Topic 1 - Accounting Policy Decisions Deck (17)
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1
Q

Identify the four fundamental components of an accounting policy

A

definition,
recognition,
measurement, and
disclosure

2
Q

Outline the role of accounting regulation and professional ethics in making and evaluating accounting policy decisions

A

accounting regulation provides guidance, professional ethics ensure that you make a policy decision based on true and fair view, .

3
Q

What is the difference between positive and normative theories in accounting?

A

-Positive’ theories concerned with descriptive
statements (‘is’, ‘are’, ‘will’, etc.), used to explain and predict, e.g., capital market theory that more disclosure reduces a firm’s cost of capital
-‘Normative’ theories concerned with statements of value, i.e., what is ‘good’ and ‘bad’ (‘should’, ‘ought’, etc.),

4
Q

Describe a basic decision making framework/model for evaluating and selecting accounting policies. (6 steps)

A

1.Identify the relevant facts including key
stakeholders, distinguish known facts from assumptions, identify the factors that are ‘unknown’
2. Define the accounting policy issues
3. Identify relevant accounting standards,
rules, & principles
4.Identify alternative accounting policies
5.For each alternative, decide to what extent
the particular alternative satisfies the
rules/principles in 3 above AND identify the
short & long term consequences
6.On the basis of the analysis in 5 above,
choose that policy that best satisfies the
relevant accounting principles/rules and
maximises positive (or minimises negative
consequences

5
Q

What are the fundamental things that must be known for a transaction to be recorded in the financial statements?

A
  1. Definition: WHAT was the transaction about?
  2. Recognition: WHEN should it be recognised?
  3. Measurement: HOW MUCH?
  4. Disclosure: WHAT ELSE do financial statement users need to know? What other information should we disclose?
6
Q

What is the definition of Accounting Policies?

A

Defined in AASB 108, para. 5 as:
“the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.”

7
Q

Why Professional Judgement is Needed? (3)

A

Modern transactions are complex
Constant innovation (e.g., financial instruments)
Accounting standards:
-don’t cover all types of transactions
-can be ambiguous (relevance/faithful rep)
-give the user choices (i.e. depreciation)

8
Q

Where no standard applies, must use JUDGEMENT that results in accounting information that is…….?

A

RELEVANT & RELIABLE

9
Q

AASB 108: When exercising judgement what 4 things should we give consideration to?

A
  • Australian Accounting Standards on similar issues
  • Concepts in the Framework
  • Pronouncements of overseas accounting standards setters
  • Accepted industry practices
10
Q

What should we use as the basis for justifying accounting policies in this course? (3)

A
  • Provision of “A True and Fair View” (provides limited guidance in distinguishing between alternatives)
  • Requirements of Accounting Standards
  • Principles in the Conceptual Framework/Ethics
11
Q

What happens if our judgement is wrong?

A
  • cause people to lose money (investors, creditors)
  • loss of public confidence in accounting profession
  • increase in regulatory/compliance costs.
12
Q

What is Theory? why is it useful?

A

Typically a series of propositions from which we reach conclusions/decisions

explaining how things work, or why events occur, predicting and prescribing (or guiding) behaviour.

13
Q

What does a positive theory do?

A

Positive theories are descriptive, explanatory or predictive, fact based.

14
Q

What does a normative theory do?

A

Normative theories prescribe how people should behave to achieve an outcome that is judged to be right, moral, just, or otherwise a good outcome. Therefore, normative accounting research is more concerned with policy recommendations.

15
Q

how can you ensure that Accounting policy choices are JUSTIFIABLE? 4

A
  • be made systematically;
  • reflect appropriate rules & concepts;
  • reflect available facts;
  • reflect professional values & ethics, e.g.,
16
Q

Do you think theory needs to be considered in financial accounting?

A

yes, financial accounting is about applying principles, and as such is about the application of a theory about accounting. They help in understanding the role of accounting in organisations, markets, and society and making predictions about the consequences of accounting choices and practices.

17
Q

Which sort of theory do you think is ‘better’ – normative or positive?

A

both types of theory complement each other. Ultimately, the normative questions are most important:
- what should we do about some accounting issue?
- which accounting policy is best?
Positive theories/research cannot answer normative questions for us