Accounting Concept Assignment

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Part A: The concept of reporting entity: The reporting entity concept was established in Australia because of publication of Statement of Accounting Concept SAC 1[ Definition of the reporting entity (August 1990)]. According to SAC1, a reporting entity is an entity in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which would be useful to them in making and evaluating decisions about the allocation of scarce resources. (SAC1)
General purpose financial reports: Financial reports which meet the criteria of general purpose financial reporting are called general purpose financial reports. General purpose financial reports
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Financial information is relevant if it is capable of making a difference in the decisions made by users. Information is only capable of making a difference if it has a predictive value, or confirmatory value or both. Along with relevant, information must be faithfully represented. To qualify these faithful criteria financial information must be complete, neutral and free from errors. (framework for the preparation and presentation of financial statements)

Enhancing characteristics of useful information: There are four qualitative characteristics that improve the usefulness of financial information, these characteristics are comparability, verifiability, timeliness, and understandability. Comparability is the qualitative characteristic that allows users to recognize and understand differences and similarities among two pieces of information. Verifiability means different knowledgeable and independent could reach single consensus, although not about the complete agreement, a particular depiction is faithfully represented. Timeliness means information is available on time to related users. Generally, the older the information, the less useful it is. Understandability means a person who has a reasonable knowledge of business and economics could understand that financial information.
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Direct verification means verifying an amount or other representation through direct observation e.g. by counting cash. Indirect verification means checking the inputs to a model, formula or other technique and recalculating the outputs using the same methodology. An example is verifying the carrying amount of inventory by checking the inputs (quantities and costs) and recalculating the ending inventory using the same cost flow assumption (for example, using the first-in, first-out method). (FPPFS)

Timeliness: Accounting information must be presented in a timely manner to be useful. If the information is not presented to users in a timely manner, its usefulness is diminished. For example, income is recognized over the period of time when its actually earn and same as expenses, a period in which they incur. Financial reports should be made on time and available to the users so that they would be able to make their decision considering the present situation of the company.
Understandability:
Clearly presenting the information and classifying it, can make the accounting information understandable. For example, clearly classifying the assets, liabilities, and equity on the Balance sheet. Method to use for the impairment of assets, depreciation methods used, and any other information that is relevant for users to understand the figures in balance sheet must disclose the notes to the
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