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FAC1601 Financial Accounting and Reporting Exam-Pack 2022
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- University Of South Africa
FAC1601 Financial Accounting and Reporting Exam-Pack 2022
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FAC1601Financial Accounting and
Reporting
Exam-Pack 2022
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CHAPTER 1: INTRODUCTION
This study guide provides brief notes on the topics covered in FAC1601. The topics covered
include the following:
Preparation of Financial Statements of Partnerships;
Changes in the ownership structure of Partnerships;
Liquidation of Partnerships;
Financial Statements of Close Corporations;
Introduction to Company Accounts;
Statement of Cash Flows;
Analysis and Interpretation of Financial Statements;
Branches;
Time value of money.
Financial Accounting
This course mainly covers the Financial Accounting side of broad Accounting. The two main
branches of Accounting are Financial Accounting and Management Accounting. Management
Accounting is mainly used for internal purposes whilst Financial Accounting is mainly produced
for external purposes.
Users of Financial Statements
In this course, focus will mainly be based on the preparation of Financial Statements. These are
supposed to be prepared in terms of International Financial Reporting Standards (IFRSs) as set
out by the International Accounting Standards Board (IASB), of which the South African Institute
of Chartered Accountancy is a member. IFRs are the generally accepted accounting practices by
Accountants throughout the whole world. The final accounts which shall be the main focus are
prepared in terms of International Accounting Standards (IAS) 1.
These accounts are prepared for various users who have differing needs. Examples of users and
their needs are as follows:
1. Investors: to assess the profitability of the entity in order to make a decision on whether to
invest or divest from the entity.
2. Management: to evaluate their performance as guardians of the owners wealth and
sometimes to measure their rewards where there are performance based bonuses.
3. Employees: to gauge the security of their jobs and assess the ability of the entity to pay. The
profitability of the firm can also be used as a basis for collective bargaining.
4. Government: to assess tax and the general economy and to compile national statistics.
5. Financial analysts: to make informed conclusions on their analysis.
6. Banks: to assess the ability to repay loans and overdrafts and to measure their likely
liquidity positions as businesses are the major providers of money to banks through their
deposits.
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7. Creditors and Loan Financiers: to assess the ability of the entity to repay loans.
8. Media: to make informed reports.
9. Customers: to assess the entity`s ability to provide services and goods.
10. Suppliers: to assess the ability of the firm to pay for goods and services and to assess the
continuity of relationships.
11. General Public: to see what the firm is spending on social responsibility.
Qualities of Accounting Information
Financial information should always meet the following characteristics:
1. Relevance: Financial information should be relevant or required by the intended user to aid
him/ her to make the required decision. Unnecessary information should be eliminated.
2. Completeness: the information should be enough in terms of accounting standards and
enough to aid the decision at hand to avoid bad decisions being made from incomplete
information.
3. Accuracy: information should be accurate enough for it`s purpose to prevent damaging
consequences.
4. Timeliness: accounting information should always be made in time, otherwise if provided
late, it might not be of any help for the decision at hand.
5. Channel of communication: the appropriate channel of communication should be used
when conveying accounting information.
6. Reliability: the information should inspire confidence in the users. There should be no
doubt on the truthfulness of the information conveyed.
7. Cost/ benefit analysis: the cost of obtaining the information should be reasonable as
compared to the benefit to be derived from the information, otherwise it will be useless to
provide the information unless for example, it is a requirement of law or it concerns an
issue of social responsibility.
Concepts of Accounting
Accounts are prepared based on what are known as the concepts of Accounting. Some of them
are summarized as follows:
1. Fair presentation: the accounts should as far as possible be presented in a reasonable and
reliable manner.
2. Going concern: the accounts are prepared assuming that the entity will continue operating
in the foreseeable future, that is, in the short run, the business will not be closed.
3. Accrual basis of accounting/ matching concept: the accounts are periodically prepared,
meaning only expenses and incomes for the period under consideration should be included
in profit statements. Any accruals should be brought into account or added and
prepayments should be eliminated or subtracted when preparing financial statements.
4. Materiality concept: accounting information should only be included or disclosed if their
exclusion will impair the decision of users of the financial statements.
5. Frequency of reporting/ periodicity concept: there should be a clear reporting cycle.
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6. Comparative information: information should be prepared in a manner which affords
comparability of financial information from one period to another and within one
accounting period.
7. Consistency: similar items should be treated in a similar manner within one financial period
and from one period to another.
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