ACC60002 – Topic 1 Page 1 of 2 Discussion Questions – Suggested Answers 1.1 What is the purpose of producing accounting information? The objective of providing accounting information is to enable users to make more informed decisions and judgements about the organisation concerned. 1.12. ‘Relevance’ and ‘reliability’ represent two key qualitative characteristics of accounting information. What do these two terms mean in an accounting context? Are they in conflict? Relevance relates fundamentally to ‘bearing upon’ the decision at hand in either a confirmation or prediction capacity. Reliability relates to ‘faithfully representing’ what it purports to represent, and is a link to the dual ideas of objectivity and neutrality. The possible conflict relates to obtaining the appropriate balance between the two as relevance is often inversely related to the passage of time, while reliability is positively related to the passage of time. 1.13 As an owner of a small business, what are three key financial attributes of the business you wish to assess when you review financial reports? The three key financial attributes are liquidity, solvency and profitability. 1.14 Reconcile financial accounting with management accounting. Your textbook clearly distinguishes between them. What are the similarities? The link between management and financial accounting is in the actual statement of financial performance and statement of financial position. For management accounting the actuals are required to compare with budgets and standards as part of the control function. For financial accounting the actuals are the substance of the financial reports.ACC60002 – Topic 1 Page 2 of 2 1.17 In relation to recent corporate crashes, what have been the main lessons in relation to the accounting process (recording and reporting procedures)? A review of corporate crashes from the perspective of accounting recording and reporting processes invariably highlights a similar list of issues: Asset values are overstated. They should have been expensed in earlier years through depreciation, amortisation, impairment, bad debts or other write-downs. More recently, it has been the intangibles that have featured prominently in the overstated assets (e.g., goodwill, rights, licences, development costs, patents, franchises, copyrights). Liabilities are understated. This is due to the use of off-balance sheet financing arrangements. Liabilities misclassified as equity or as non-current. When in fact they are current (e.g., leases and preference shares). Expenses understated or deferred. This is closely aligned with overstated assets and understated liabilities. Revenues are overstated or recognised too early (brought forward). Subsequently, the revenues are not realised. Cash mismanaged. Businesses are undercapitalised with too little equity and too much short-term debt. They grow too quickly and the working capital management is at best ineffective. 1.19. Accounting is said to perform a ‘decision-usefulness role’ as well as an ‘accountability (stewardship) role’. Distinguish between these two roles and provide an example of each. Accountability (or stewardship) is traditionally identified with objectively tracking transactions and events to ensure that they have been fully and appropriately accounted for. It would include the use of historical cost and objectivity as underlying rationales, and focuses on asset security and past transactions and events. Decision-usefulness identifies the decision-making process and the relevance of financial information to the decision. It would therefore tolerate greater use of estimates and future projections.