Financial Accounting Process: Relevance and Representation Analysis

This financial accounting assignment addresses key concepts, including reporting entities and the characteristics of financial information. The solution begins by defining reporting entities based on Statement of Accounting Concepts (SAC) 1, emphasizing their connection to general-purpose financial reporting and the criteria for their formation. The assignment then explores the objectives of general-purpose financial reporting as outlined in SAC 2, focusing on providing users with essential information for resource allocation decisions. Furthermore, it delves into the relevance and faithful representation of financial information, along with enhancing characteristics like comparability, verifiability, timeliness, and understandability. The solution provides practical examples to illustrate each concept, making it a comprehensive resource for understanding financial accounting principles.

Running head: FINANCIAL ACCOUNTING PROCESS
Financial Accounting Process
Name of the Student
Name of the University
Author’s Note

1FINANCIAL ACCOUNTING PROCESS
Table of Contents
Answer to Question 1......................................................................................................................2
Requirement a..............................................................................................................................2
Requirement b..............................................................................................................................2
Requirement c..............................................................................................................................2
Answer to Question 2......................................................................................................................3
Requirement a..............................................................................................................................3
Requirement b..............................................................................................................................3
Requirement c..............................................................................................................................4
References........................................................................................................................................6

2FINANCIAL ACCOUNTING PROCESS
Answer to Question 1
Requirement a
As per SAC 1, the concept of reporting entities does not depend on public sector and
private sector. The concept of reporting entities is highly connected with the objectives of
general-purpose financial reporting (aasb.gov.au, 2018). According to the general purpose
financial reporting, the business entities with the legal classes are eligible for the formation of
reporting entity. Moreover, in order to become a reporting entity, the entities are required to
provide all the necessary information required by general purpose financial reporting.
Requirement b
According to the Statement of Accounting Concepts SAC 2, the main aim of the
preparation of general-purpose financial reports is to provide the users with the necessary
information about the reporting entities so that they can be useful for the making and evaluation
of decisions related to the scare resource allocation (aasb.gov.au, 2018).
Requirement c
Three main factors are the separation of economic interest from management, economic
or political importance or influence and the financial characteristics. Greater separation between
the management and ownership indicates the existence of the reporting entities. Greater political
importance of an entity indicates the existence of the reporting entities. The presence of financial
characteristics of the companies indicates the existence of the reporting entity (aasb.gov.au,
2018).

3FINANCIAL ACCOUNTING PROCESS
Answer to Question 2
Requirement a
Two fundamental characteristics of financial information are Relevance and Materiality;
and these are discussed below:
Relevance: The relevant financial information has the capability to make difference in the
decision-making process of the users (aasb.gov.au, 2018). Relevant financial information
possesses both the predictive value and confirmatory value; and both these values are
interrelated. Predictive value of the information can be use for the prediction of the future
outcomes. On the other hand, financial information possesses confirmatory value in case
necessary feedbacks related with any precious evaluation can be obtained by using them (Laing
& Perrin, 2014).
Faithful Representation: Information can be considered as material in case its misstatement or
omission can have influence on the decision-making system of the users based on the financial
information about any specific entity (aasb.gov.au, 2018). According to this specific
characteristic, it is required for the business entities to represent financial information on faithful
basis and it needs to have three characteristics; they are compete, neutral and free from error
(Rankin et al., 2012).
Requirement b
Four enhancing characteristics of financial information are discussed below:
Comparability: This particular characteristic of financial information enables the users in the
identification and understanding of differences and similarities in the financial items (Barth,
2013).

4FINANCIAL ACCOUNTING PROCESS
Verifiability: In the presence of verifiability, the users of financial information can be assured
that the representation of the financial information has been done on faithful basis for presenting
the economic phenomena (Henderson et al., 2015).
Timeliness: This characteristic states that the required financial information needs to be available
for the decision-makers at the right time in order to influence the financial decisions (Barth,
2013).
Understandability: According to this characteristic, the financial information need to be
classified, characterized and presented clearly so that it can become understandable for the users
(Henderson et al., 2015).
Requirement c
The examples are provided below:
Relevance: Information of revenue in the current year can be used as the base basis for the
prediction of the revenue for the future years. Thus, the result of this comparison can be used for
helping the decision-making process of the users (aasb.gov.au, 2018).
Faithful Representation: One example of faithful representation is the complete description
about the assets of the companies in the financial statements.
Comparability: The faithful representation of the assets of the company possesses the degree of
comparability for the similar assets (aasb.gov.au, 2018).
Verifiability: The example of verifying the inventory is to check the inputs and to recalculate the
ending inventory with the help of same cash flow assumption.

5FINANCIAL ACCOUNTING PROCESS
Timeliness: The publication of the financial statements of the companies in a particular time of
the years is the example of timeliness.
Understandability: Publication of the financial statements in a user-friendly language is an
example of understandability (aasb.gov.au, 2018).

6FINANCIAL ACCOUNTING PROCESS
References
Barth, M. E. (2013). Measurement in financial reporting: The need for concepts. Accounting
Horizons, 28(2), 331-352.
Definition of the Reporting Entity. (2018). Aasb.gov.au. Retrieved 16 March 2018, from
http://www.aasb.gov.au/admin/file/content102/c3/SAC1_8-90_2001V.pdf
Framework for the Preparation and Presentation of Financial Statements. (2018). Aasb.gov.au.
Retrieved 16 March 2018, from
http://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-
14.pdf
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting.
Pearson Higher Education AU.
Laing, G. K., & Perrin, R. W. (2014). Deconstructing an accounting paradigm shift: AASB 116
non-current asset measurement models. International Journal of Critical
Accounting, 6(5-6), 509-519.
Rankin, M., Ferlauto, K., McGowan, S. C., & Stanton, P. A. (2012). Contemporary issues in
accounting. Milton, Australia: Wiley.