Check List for Level 2 Accounting Concepts exam
Which concepts do
I need to learn?
What are the key points I should
include in my answer
Overarching concept
- How users make
- Link answers to decision making as
use of
wherever possible and in particular
accounting
where the question requires it
information for
decision making
Purpose, components and limitations of financial statements
- Income statement
- Include context of the business Refer
- Statement of
to the items in the financial statement
financial position
- Link purpose to decisions made based
- Cash flow
on the statement
statement
- See Appendix 1
- Statement of
accounting policies
Purpose, components and limitations of financial statements
Income statement - Classification of expenses/incomes
Position statement - Classification of assets/liabilities
Cash flows
- Cash in, cash out, net cash flow
Policies
- Policies for measurement of financial
elements, entity and changes in
policies
Purpose, components and limitations of financial statements
Income and
- Some estimates eg depreciation,
position
doubtful debts
statements
- ‘Non-monetary’ items not included –
quality of product/service, location,
staff ability
- Link to decision making
Cash flows
- Only shows past cash flows, not future
cash flows which are needed for
decision making
How do I to get to my goal?
did I miss a key point
what do I need to learn
Which concepts do
I need to learn?
What are the key points I should
include in my answer
Concepts used in the preparation of financial statements
- Accounting
- Business finances/financial elements
Entity
- Owner’s personal finances/financial
elements
- Separation for accounting purposes
- Monetary
- What: Use of dollars to measure
measurement
financial elements
- How: Use of same NZ$ currency
- Why
- Impact on decision making
- Reporting period - What (is it)
- How (applied to the financial
statement)
- Why – link to decision making
- Historical cost
- What – name item
- How – refer to original cost
- Why – transaction amount is
reliable/recorded on a document
- Why impact on decision making
- Accrual
- What is the adjustment
accounting
- How reported in income statement
- How reported in position statement
- Why reported in each statement
- Link to recognition criteria of financial
elements
- Going concern
- What – business does as a going
concern
- How – continue into foreseeable
future
- Why – no need or reason to close
- Impact on decision making
- Capital and
- Asset v expense
revenue
- Position statement v income
expenditure
statement
- One-off v regular payments
- Used over/kept more than one year v
used up in one year
- Depreciation
- Allocation of cost
- Useful life
- Recognise use
- Straight line v diminishing value v units
of use describe different patterns of
recognising use
How do I to get to my goal?
did I miss a key point
what do I need to learn
Which concepts do
I need to learn?
What are the key points I should
include in my answer
Qualitative characteristics
- Relevance
- Information capable of making a
difference to decisions by users
- Information with predictive value –
used to predict future outcomes
- Information with confirmatory value –
provides feedback about (confirms or
changes) previous evaluations
- Materiality
- Information is material if omitting or
(a component of
misstating it would influence the
relevance)
decisions users make on the basis of
the financial information about the
entity
- Information may be material by its size
and/or nature depending on the entity
- Faithful
- Faithfully represented information is
representation
as far as possible complete, neutral
and free from error
- Complete means all necessary
information is provided
- Neutral means the information is free
from bias
- Free from error means the information
is presented without errors in the
process used to produce the
information
- Comparability
- Information is more useful if it can be
compared with similar information
about other entities or with similar
information about the same entity
over time
- Comparability allows users to
understand similarities and differences
in information they are comparing
- Consistent use of accounting
measurement methods/policies assists
comparability
- Verifiability
- Helps to ensure faithful representation
- Means two or more independent
observers of the information would
reach consensus about it
- Timeliness
- Information needs to be available in
time to influence users decisions
- Understandability
- Classifying, characterising and
presenting information clearly and
concisely makes it understandable
- Financial reports are prepared for
users who have a reasonable
knowledge of the business and its
economic activities
How do I to get to my goal?
did I miss a key point
what do I need to learn
Which concepts do
I need to learn?
What are the key points I should
include in my answer
Concepts used in the preparation of financial statements
- Assets
- Past with what
- Present with what and how
- Future with what, how and why
- Probable inflow of future economic
benefit (FEB) linked to why above
- Reliable measure linked to faithful
representation
- Link probable inflow of FEB to
relevance and decision making
- Liabilities
- Past with what
- Present with what and how
- Future with what, how and why
- Probable outflow of FEB linked to why
above
- Reliable measure linked to faithful
representation
- Link outflow of FEB to decision making
- Equity
- Business assets less business liabilities
- Increased by profit or additional owner
investment
- Incomes
- What the income is
- What/who is providing the income
- How and why increase in which
asset/decrease in which liability
- How and why increase in equity (more
profit)
- Not owner contribution
- Probable inflow of FEB (cash already,
or accounts receivable probable
turned into cash)
- Reliable measure linked to faithful
representation
- Expenses
- What the expense is
- What/who is being paid
- How and why decrease in which
asset/increase in which liability
- How and why decrease in equity (more
profit)
- Not owner contribution
- Probable outflow of FEB (when cash
out from bank or to pay liability or
probable reduction in which asset)
- Reliable measure linked to faithful
representation
How do I to get to my goal?
did I miss a key point
what do I need to learn
Appendix 1 Purpose of financial statements summary
Income statement
Statement of
financial position
Cash flow
statement
Accounting
policies
Main purpose
To determine profit for the year
To help make decisions about improving
profit through increasing income and/or
decreasing expenses
To report assets, liabilities and equity on
balance day (a point in time)
To help make decisions about the financial
position – is the business financially
stable/equity more than liabilities
To see where the business has been
spending its cash and where the cash has
come from
Helps make decisions about the ability of
the business to generate sufficient cash to
pay for its expenses, assets, debt
repayments and owner’s drawings
Note the purpose is not to determine the
closing bank balance. The bank account in
the general ledger tells you this.
To set out the policies used to measure
the financial elements reported in the
financial statements so users can make
good decisions knowing how for example
assets have been measured
Items to write about
Incomes – is there enough, can it be increased?
Expenses – are some too high, can they be
decreased?
Gross Profit – is it covering expenses?
Profit/loss for the year
Profit is important in the long run
Current assets
Current liabilities
Non-current assets
Non-current liabilities
Equity
Cash receipts
Cash payments
Net cash flow
Are cash receipts greater than cash payments –
this is important in the long run?
Is net cash flow improving?
Identification of the business as an accounting
entity (separate from owner)
Measurement of assets at historical cost
Measurement of property, plant and equipment
Method(s) of depreciation
Measurement of accounts receivable
Measurement of inventory
Measurement of investment assets
Changes in accounting policy (or no changes
statement)