P1 Introduction

Question 1

What is the difference between a financial accountant, a cost and management accountant and an
auditor?

Answer 1

The role of a financial accountant is to accurately report information on past performance of a business
to users and interpret the results thereof.
The role of a cost and management accountant is to ascertain business costs for day-to-day planning,
cost control and internal decision making.
The role of an auditor is to give reasonable assurance that the accounting information reported to
external users is true and fair and follows generally accepted accounting principles.

Question 2

What is the conceptual framework?

Answer 2

The conceptual framework’s purpose is to provide guidelines for the treatment and preparation of
accounting information. It is the basis of IASs and IFRSs. Accounting information should give a true and
fair view. This is done when information is relevant and faithfully represents what it is supposed to
represent.
Information is faithfully represented (verifiability), comparable (comparability), and relevant if it is
understandable (understandability) and produced in a timely manner (timeliness).

Question 3

Describe FOUR qualitative characteristics that information included in financial statements should have
in order to be suitable for decision-making by lenders and investors.

Answer 3

Fundamental characteristics: Relevance; Faithful representation
Enhancing characteristics:
Verifiability
Understandability
Comparability
Timeliness

Question 4

The fundamental qualitative characteristics?

Answer 4

Relevance – financial information is regarded as relevant if it is capable of influencing the decisions of
users.
Faithful representation – this means that financial information must be complete, neutral and free from
error.

Question 5

The enhancing qualitative characteristics?

Answer 5

Comparability – it should be possible to compare an entity over time and with similar information about
other entities.
Verifiability – if information can be verified (e.g. through an audit) this provides assurance to the users
that it is both credible and reliable.
Timeliness – information should be provided to users within a timescale suitable for their decision
making purposes.
Understandability – information should be understandable to those that might want to review and use it.
This can be facilitated through appropriate classification, characterisation and presentation of
information.

Question 6

Mention THREE primary reports included in financial statements. Describe the objective of each
report.

Answer 6

THREE primary reports:
• SOPL – statement of profit or loss = presents revenues and expenses and gives the profit or loss for
the period;
• SOE – statement of changes in equity – movement in equity and reserves during an accounting
period;
• SOFP – statement of Financial Position – presents assets, liabilities and equity as at the reporting
date. It provides important inormation about the liquidity and capitalisation of an organisation;
• SOCF – Statement of Cash Flows – presents cash inflows and outflows that occurred during the
reporting period. This can provide a useful comparison to the income statement especially when the
amount of profit or loss reported does not reflect the cash flows experienced by the business.

Question 7

Briefly comment on why existing and potential investors are considered important users of financial
statements. Identify TWO other users of Financial Statements briefly describing their information
needs

Answer 7

Existing and potential investors are considered important users of financial statements as they will be
able to see what return they will get from investing in the business. If the business is doing well, this in
turn will push up the market price of the shares and attract potential investors. If on the other hand, the
business is not doing well, this will decrease the market price of the shares and discourage potential
investors for investing.
TWO other users of Financial Statements:
• Banks: they provide loans and credit facilities (overdraft) so will want to know if they will be paid
back
• Government: Taxes are paid to the government so it will want to know how the business is doing to
asses if the tax to be paid is correct.