Financial Statements and Accounting Concepts

[Deepika]

"It has been said that financial statement is reliable, consistent and comprehensive. Discuss how accounting concepts attempt to promote the above. Support your discussion with examples."

Hello Sir, I am stuck with this very difficult question. Could you please help?

[ACCA_Tutor]

Hi!

Consider the following.

Financial statements are reliable if they are free from bias and error. Elaborate on the prudence concept (e.g. as applied to stock/inventory valuation). You may also consider substance over form (e.g. asset acquired under hire purchase being shown as fixed asset/non-current asset).

Financial statements are made consistent for example by using the same depreciation method from one year to another. Also, similar items are given the same accounting treatment (e.g. all motor cars, lorries and vans may be consistently classified under the heading "motor vehicles"). However, financial statements may not be consistent as depreciation methods, for example, may be changed.

Financial statements are made comprehensive by using historical cost. Also, materiality is important here. Users are not bothered with insignificant details as they are unlikely to affect decision-making. Fair value may also be more appropriate for investors.

You are encouraged to elaborate on the above ideas.


Regards,

ACCA Tutor