Lecture 1

Section 1 : Accounting Review

Nature and role of accounting

Accounting as a service function

 Providing services needed by the society

 Measuring economic resources for decision making for people and society
 Generically evolving with the society

Accounting as an information system

Input/output (Financial statement/report , GPFR) to User

Financial Accounting (Page 18)

Accounting is the information system that identifies, records, and communicates the economic
events of entity to interested users.

These functions are Financial Accounting

 Financial Reporting/ Statements

 Accounting entity/ Reporting entity
 Users/ External users

Users

Business organisation , Entity or person

3 groups of external users

1. Owners or equity
2. Lenders
3. Suppliers

They are stakeholders – they put money in up front

External – individuals and entities outside the organisation

- Resource providers (Suppliers)

- Lenders (Bank)
- Recipients of good and service
- Parties providing a review or oversight function (Auditor, independent director)
- Investors

Financial statement

 Balance Sheet ( A statement of financial position) - Financial Position at snapshot of time

Is a listing of the organisation’s assets, liabilities, and stockholders’ equity at a point in time.
BS is like a snapshot of entity’s financial position, frozen at specific of time. BS summarises
the entity’s (resource) assets, liabilities (obligations), and owners’ equity (claims)
Focus on a single date
 Income Statement ( A Statement of comprehensive income) - Financial Performance
 The purpose : is to answer/reporting Revenues from operating activities (selling) and then
subtract the Expenses incurred ingenerating those revenues and operating the entity –
result from day-to-day operating activities. Gains and Losses are also reported on the
income statement – result from nonoperating activities
Results for a period of time

 The statement of cash flow – A reconciliation of the balance of cash from the beginning to
the end of the final year
The purpose of SoCF is to identify the sources and uses of cash during the year.
 The statement of change in Equity – Movements in residual claim attributable to the owners

Limitations and Criticisms

- Looking back in the past

- A picture of something
- Depending on the angle you looking at- people look at difference way

Accounting information is QUANTITIVE and based on historical information

Section 2 : Users, General Purpose Financial Reports (GPFR)

User – Accounting Entity

Types of financial reporting

General purpose financial reports (GPFR)

 Financial reporting relies on the information from financial accounting processes within the
entity, and the entities use this information to prepare reports for external users
 However, ecternal users have different information needs, and they generally do not have
the power to request tailored financial information (P. 16)
 This is where GPFR, prepared according to GAAP, play a vital role
 Special purpose financial accounting
 where users cannot require reporting entities to provide information directly to them
 publicly available
 Governed by GAAP and more specifically, Financial reporting standards

The objectives of Financial reporting are to provide:

1. Information that is useful to a wide range user in making economic decisions

2. Specific information about the financial position, performance, and cash flows of an entity
3. Information that shows the stewardship (accountability) of management

Special purpose financial reports (SPFR) – someone can tailor it

 Where user can require info to be provided to them and specify e.g. content and format
 Financial statements prepared for the purpose of tax filing or applying for bank loan,
insurance
External users and decision making

 Financial reporting is a key tool, entities use to communicate with external users of financial
reports
 Information about the resources of the entity and claims against those resources is central
to user’s decision-making
 Such decisions often ‘involve buying, selling, or holding equity and debt instruments and
providing or setting loans and other forms of credit’

Financial reporting is done for individual firms or entities. It is aimed primarily at meeting the needs
of external users of accounting information who would not otherwise have access to the firm’s
records. Investor, creditors, and financial advisers are the primary users who create the demand for
accounting information. Financial reporting is designed to meet the needs of users by providing
information that is relevant to making rational investment and credit decisions and other informed
judgements. The information reported in financial accounting relates primarily to past transactions
and events that can be measured in dollars and cents.

Owners, as external users of financial information. The separation of owners and the accounting
entity

Section 3 : GAAP, Conceptual Framework

Generally accepted accounting practice (GAAP) – P. 23 -24 Financial accounting standard

GAAP are the standard framework of guidelines for financial accounting used in any given
jurisdiction; generally known as accounting standards. These include the standards, conventions, and
rules that accountants follow in recording and summarising and in the preparation of financial
statements.

 Conventions or doctrines that have evolved over time

 Principles, assumptions, and widely shared practice that underpins the accounting as body of
knowledge
 GPFR is prepared according to GAAP

Compliance with NZ GAAP

 FRA 2013 s.9 states that the financial statements of a reporting entity must comply with NZ
GAAP
 As per s. 8 FRA 2013, NZ GAAP means that financial statements must comply with
a) Applicable financial reporting standard and
b) In relation to matters for which no provision is made in applicable financial reporting
standards, an authoritative notice

Conceptual Framework
Economic decisions : therefore we have standardised information allows users to make economic
decision - > e.g. the entity’s ability to generate cash, its profitability, its return on equity, its
borrowing needs, and so on

Qualitative Characteristics – service Function of accounting/ supplementary reading

 Fundamental qualitative characteristic : - Basic quality

o Relevance
Relevance financial info is capable of making a difference in the decisions made by
users : 1. Predictive Value 2. Confirmatory Value
Info must assist users in making and evaluating decisions about the allocation of
their resources. It must confirm or correct prior expectations about past events
(Feedback value) e.g. impact of the CHC earthquakes. Assist in forming, revising or
confirming expectations about the future (Predictive value). Info may be relevant
because of its nature, or its materiality
o Faithful representation (Reliability)
Reliable info is : Complete, Neutral, and free from error
Info is reliable when it is free from material error and bias and can be depended
upon by users to represent faithfully that which it purports to represent :
a) Representational faithfulness
b) Substance over form – info presented in accordance with economic
reality not merely legal form
c) Neutrally – free from bias
d) Prudence – the exercise of a degree of caution in making estimates
but NOT undue conservatism
e) Completeness – omissions may cause info to be false or misleading

 Enhancing qualitative characteristics :

o Comparability – this year/ next year get any better?
Users should be able to identify similarities and differences between that info and
info in other reports. Comparability applies to comparison of financial reports of
different entities and of financial reports of the same entity over different time
periods. Users need to be informed of policies, changes in policies and the effects of
changes. While this implies consistency, consistency is not an end itself – changes in
policies should be made if more relevant or reliable alternatives exist. Corresponding
info for preceding periods should be disclosed.
o Verifiability - evidence base
o Timeliness – GPFR to be release in 5 months
o Understandability
Users should reasonably be expected to be able comprehend the meaning of the
info. This will depend in part on users’ own capabilities and in part on the way the
info is displayed. Users are assumed to have a reasonable knowledge of the entity’s
activities and environment. They are also expected to study the information with
reasonable diligence. Complex info should not be excluded just because some users
may not understand it.
Section 4 : Financial Statement Audit

Auditor report and auditors’ opinion

 the result of an audit is the independent auditor’s report

 key contents of the auditor’s report
o Scope of audit : the financial statements have been audited
o Directors responsibility and auditors responsibility
o Basis of audit opinion: in compliance of audit standards, sufficient and appropriate
audit evidence
o Auditor’s opinion : whether the financial statements are fairly presented and in
accordance with GAAP

Auditing – The quality control inspector

 An independent examination of financial info on entity

o External, internal, and open to contract
 Auditor will express an opinion on the financial statements
 This helps to establish ‘credibility’ in the financial statements
 The auditor may provide :
o A qualified opinion
o An unqualified opinion
 An opinion is said to be ‘unqualified’ when the auditor concludes that the Financial
Statements give a ‘true and fair view’ in accordance with the financial reporting framework
used for the preparation and presentation of the financial statements
 A ‘qualified’ audit report is given by the auditor in either of these two cases
o When the financial statements are materially misstated; or
o When the auditor is unable to obtain audit evidence regarding particular account
balance, class of transaction or disclosure.