Accounting Information: Users, Stakeholders, Financial Statements, and Principles

Part A

1) Users of accounting information The textbook, Smart, Awan & Baxter, p. 21 lists the following seven stakeholders who have an interest in accounting information:
• owners and investors
• managers
• creditors and lenders
• employees
• the government
• unions
• the general public.

a) Explain the meaning of ‘stakeholder’.

b) For each of the first five listed stakeholders above (i.e. excluding unions and the general public), state:

i) a specific decision that the stakeholder would make, that would require accounting information before they made it

Note: do not use the same type of decision twice.

ii) the specific accounting information they would require for that decision
iii) the financial statement from which they would obtain that required information.

c) Smart, Awan & Baxter (text, chapter 2) outline two types of investor – current and prospective. Briefly describe two general types of information they are interested in, and what they use the information for.

d) The text (in chapter 2) further outlines three general types of information needs for managers. Briefly describe these three, and how managers would use this information.

e) Creditors are interested in solvency and security. Briefly define and explain these in relation to creditors’ needs.
2) Distinguish between ‘general purpose’ and ‘special purpose’ financial statements and outline the significance of this distinction.
3) It is vital that financial statements can be relied on. What steps would you recommend an organisation takes to ensure that the information in its financial statements achieves this?

4) Give an example of an implication for each of the following assumptions/principles.

i) Going concern
ii) Accrual basis
iii) Period reporting
iv) Understandability
v) Relevance
vi) Reliability
vii) Comparability

5) Define the (accounting) entity concept, and explain two implications that follow from adopting it.
6) Define ‘monetary convention’, and explain the main advantage of (and rationale for) applying the monetary convention to accounting records.
7) Explain 2 of the following internal control measures, with an example and implication for each:

Part B

1) Distinguish between cash basis accounting and accrual basis accounting, by listing the types of transactions that each records and/or does not record.

2) Your friend Randolph has been reading about the collapse of Enron in the USA, and has asked about the meaning of the terms ‘capital expenditure’ and ‘revenue expenditure’.
Explain how capital expenditure and revenue expenditure are different, and why it is important to differentiate between them, particularly in regard to their effect on financial statements.

3) Explain why accrual accounting is the preferred accounting method, including in your explanation the terms ‘accounting period’ and ‘matching principle’.

Part C

1) Teena Spagetti buys and sells shoes in bulk lots. Her business trading name is Footsies Co. Teena is in her first year of business, so is not yet registered for GST, and uses a perpetual inventory accounting system. Assume transactions are on credit, unless stated as ‘paid’ or for ‘cash’. Teena’s transactions for November 20X1 were as follows:

Teena commenced business by depositing cash into her business account

a) Record these transactions on the accounting equation spreadsheet below or create your own excel spreadsheet, totalling your columns at the end of the month. (NB: it is best to check your column totals after every new line entry (or transaction) to ensure the columns balance. Rather than totalling the columns after fully completing the spreadsheet and then having to locate where it doesn't balance).