SUMMARY POINTS FOR ACCOUNTING

UNIT 1

ACCOUNTING STANDARDS
WHAT ARE ACCOUNTING STANDARDS?
Accounting standards are a set of guidelines and
principles formulated by an authorized body for
preparation and presentation of financial
statements.

WHAT IS THE PURPOSE OF ACCOUNTING

STANDARDS?
The purpose of accounting standards is to
seek to iron out areas of differences in the preparation
and presentation of accounting information,
recommend disclosure of accounting basis,
identify any departure from the standards
and improve existing disclosure requirements.
In other words, accounting standards serve to promote
the understandability, comparability, relevance and
reliability of financial reports.

International Financial Reporting Standards (IFRS)

are a set of accounting rules developed by IASB so
that companies accounts are understandable and
comparable across the international boundaries.

The benefits to users for complying with International

Financial Accounting Standards are:
Enable users to assume that there is consistency from
year to year in the methods used to prepare a firm's
financial statements.
Users can be fairly confident that the firms financial
statements are true and fair and relevant.
Users can form reasonably confident conclusions when
comparing one firm to another, and comparing one firm's
financial results to that of its industry

IFRS FOR SMES

IFRS for SMEs is a self-contained global
accounting and financial reporting standard
applicable to the general-purpose financial
statements of, and the other financial reporting by,
entities that in many countries that is known as
small- and the medium-sized entities.
Full IFRS and IFRS for SMEs are promulgated by
the International Accounting Standards Board
(IASB).

CONTROLS NECESSARY FOR ACCOUNTING

ELECTRONIC DATA

Accounting software/computers/technology used to

prepare accounting information because:
It is more cost effective to use technology
It helps in recording and preparing financial
statements more quickly than doing it manually
Gives you more time to do other work
Easy to store and retrieve accounting data
Fewer mistakes are made
Less likely for fraud to be committed

Controls that may be put in place for your electronic

data
Password protection
Firewalls
Encryption
Authentication
Separation of duties
Rotation of duties

You should be able to explain each

Advantages of putting in controls in place for data

processing environment
Less security breaches
More reliable accounting information
Less down time (as there is a backup system)
Timely preparation of financial statements

What are the drawbacks of using technology in

accounting
costly to implement
costly to maintain
difficult to learn to use the software

Measures that may be put in place, if there are

malfunctions/downtime
back up data on durable saving devices
storing back up data at remote locations
efficient IT personnel

NOTES TO FINANCIAL STATEMENTS: PURPOSE

Financial statements or financial reports are often

complex and may include an extensive set of notes to
the financial statements and management discussion
and analysis.
The notes typically describe each item on the balance
sheet, income statement and cash flow statement in
further detail.
The purpose of financial statements is to provide
information about the financial position, financial
performance and cash flows of an entity that is useful to
a wide range of users in making decisions.
The financial statements report numbers but it is the
notes that inform us as to how the numbers came
into being.

In cases where the firm has a choice of accounting

methods, that choice will likely have an impact on
both the balance sheet and the income statement.
Hence, the analysis of financial information is not
meaningful unless we know what choices have
been made by the company.
Notes (footnotes) to the financial statements are
added to meet the requirements of full Disclosure.
They are used to help users of the financial
statements interpret some of the more complex
items and are considered an integral part of the
financial statements

WHAT ARE THE NOTES TO THE FINANCIAL

STATEMENTS?
The notes must:
present information about the basis of preparation
of the financial statements and the specific
accounting policies used;
disclose any information required by IFRSs that is
not presented elsewhere in the financial statements
and provide additional information that is not
presented elsewhere in the financial statements but
is relevant to an understanding of any of them [IAS
1.112].
Notes should be cross-referenced from the face of
the financial statements to the relevant note [IAS
1.113].

IAS 1.114 suggests that the notes should normally be

presented in the following order:
a statement of compliance with IFRSs;
a summary of significant accounting policies applied,
including:
the measurement basis (or bases) used in preparing the
financial statements;
the other accounting policies used that are relevant to
an understanding of the financial statements;
supporting information for items presented on the face
of the statement of financial position (balance sheet),
statement of comprehensive income (and income
statement, if presented), statement of changes in equity
and statement of cash flows, in the order in which each
statement and each line item is presented [IAS 1.117].

FINANCIAL STATEMENTS

Some financial statements provided by a firm

include:
Statement of Cash Flow- identifies cash flows and
cash out flows over a period of time;
Statement of Owners Equity-explains changes in
equity from net income and from owner investments
and withdrawals over a period of time;
Balance Sheet-describes a companys financial
position and
Income statement- describes a companys
revenues and expenses along with the resulting net
income or loss over a period of time (Larson, Wild
and Chiappetta 2005).

RATIO ANALYSIS

Ratio analysis used to determine financial

performance of a business include:
Profitability ratios: Ratios that indicate how well
the firm does in relation to its profits from sales and
assets employed
Liquidity ratios: Ratios that indicate the firms
ability to meet short-term obligations
Solvency ratios: Ratios that indicate the firms
ability to generate revenues and meet long term
obligations
Activity/Efficiency ratios: These ratios indicate
inventory turnover, payables and receivables
periods

TYPES OF RATIOS
1. Liquidity
Current ratios
Acid test ratios

3. Profitability
Gross margin percentage
Net income percentage
ROA
ROCE
Price earnings ratio
Earnings per share
Dividend pay-out ratio
Dividend per share

2. Solvency
oDebt to total asset
oDebt to equity or gearing
oTime interest earned/interest cover

Activity/Efficiency ratios
Inventory (stock) turnover ratio
Payables or creditors payment
period
Receivables or debtors collection
period

The significance of ratio analysis is determined by:

comparison to previous years
competitors
budgets (expected performance)

LIMITATIONS OF FINANCIAL RATIOS

Ratios only show the results of carrying on business; they do not

indicate the causes of poor ratios. Further investigation is
required.

The accuracy of ratios depends upon the quality of the

information from which they are calculated; the required
information is not always disclosed in accounting statements and
account headings may be misleading

Ratios can only be used to compare like with like.

Ratios tend to ignore the time factor of seasonal businesses, for

example, widely fluctuating stock levels and debtor levels

They can be misleading if accounts are not adjusted for inflation.