6 Identify accounting assumptions and qualitative characteristics LO1,6 Consider

Question

6 Identify accounting assumptions and qualitative characteristics LO1,6 Consider the following independent scenarios: a Peter's Pizza has been in business for 25 years. All of its operations are profitable, and the accountants believe that the company will continue to operate into the foreseeable future A bank used the information presented in Fiona's financial statements to determine if it should extend a $300000 loan to Fiona. The information in the financial statements made a difference in the bank's lending decision. The manager of Martha's Antiques does not like to change accounting procedures because it hinders her ability to make year-to-year comparisons. Sarah Schofield, owner of Homebush Mouse Hospital informs her accountant that she does not want to review any accounting issue that is smaller than 1 per cent of profits. b c Required Identify the accounting assumption or qualitative characteristic that relates to each scenario.

Explanation / Answer

6a) This is a perfect example of “Going Concern Concept” or “Going Concern Assumption.” It means that businesses should be treated as if it will continue to operate indefinitely or at least long enough to accomplish its objectives. Companies that are expected to continue are said to be a going concern and those that are expected to close in the near future are not a going concern.

6b) The assumption to be used in “Relevance”. This means that the information provided in the financials or financial system has an impact or will have an impact on the decision-making of someone perusing the information.

6c) The assumption to be used in “Comparability.” This means that same set of policies and principles are used in preparing the financials for the company which can be compared easily. If there are 2 different set of principles used in 2 or more years then that would create problems and confusion in comparing the numbers and would give wrong results.

6d) The assumption to be used in “Materiality.” The concept of materiality is relative in size and importance. Financial information might be material for one company whereas it might be immaterial for other.

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