1.3 Bases of Accounting

Ed Blocksidge
Flashcards by Ed Blocksidge, updated more than 1 year ago
Ed Blocksidge
Created by Ed Blocksidge over 5 years ago
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ACA Financial Accounting & Reporting (Reporting Framework & Ethics) Flashcards on 1.3 Bases of Accounting, created by Ed Blocksidge on 12/23/2014.

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Question Answer
1. What are the three bases of accounting? (3) 1. Accrual basis 2. Cash basis 3. Break-up basis
What is the fundamental principle of the accrual basis of accounting? (1) Transaction are recognised when they occur, not when the realted cash flows into or out of the entity (1)
Give the three examples of accruals basis of accounting (3) 1. Sales are recorded in the period in which the risks and rewards of ownership pass from seller to buyer, not when the seller receives payment 2. Expenses are recognised in the period when the goods or services are consumed, not when they are paid for. 3. The consumption of non-current assets, such as plant and machinery, is recognised over the period during which they are used by the entity (ie the asset is depreciated), not in the year of purchase as they would be under the cash basis of accounting
What is the advantage of the accruals basis over the cash basis of accounting? (2) The accruals basis is more useful in making economic decisions (1) because information is provided both about past transactions involving cash and about future resources flowing into and out of the entity (1)
Describe the 'going concern' assumption of the accruals basis (1) Financial statements prepared under the assumption that the entity will continue in operation for the foreseeable future, in that management has neither the intention nor the need to liquidate the entity by selling all its assets, paying off all its liabilities and distributing any surplus to the owners (1)
Give two examples of the importance of the going concern basis (2) 1. The measurement of receivables from trade customers is made on the basis that there is no time limit over which management will chase slow payers 2. The measurement of NCAs is made on the basis that they can be utilised throughout their planned life
What restrictions are there on the use of the cash basis of accounting? (1) Its use is not allowed by IFRS or UK GAAP (1)
Where IS the cash basis of accounting used? (1) In cash flow statements (1)
What is the principle of the cash basis of accounting? (1) Only the cash impact of a transaction is recorded (1)
Give three examples of transactions under the cash basis of accounting (3) 1. Sales are recorded in the period in which the seller receives full payment 2. Purchases are recorded in the period in which the goods are paid for rather than the period in which the goods are purchased 3. The purchase of a capital asset is treated as cash outflow at the point that the cash consideration is paid. No subsequent adjustment is made for depreciation
When would the break up basis of accounting be used? (1) When there is an intention to sell off the assets of the business, this typically happens when the business is in financial difficulty and needs the cash to pay its creditors (1)
What are the two effects of using the break up basis on the SOFP? (2) 1. Classification of assets: All assets & liabilities are classified as current rather than non-current 2. Valuation of assets: Assets would be values on the basis of the recoverable amount on sale. This is likely to be substantially lower than the carrying amount of assets held under the historical cost of accounting
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