Theory question 101
Introduction to Accounting(a) Mention three disadvantages to a business that does not keep proper accounting records.
(b) Explain the following characteristics of accounting information: (i) Relevance; (ii) Comparability; (iii) Consistency; (iv) Reliability.
(c) State two limitations in the use of accounting information for business decision making.
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(a) Any three: true profit or loss cannot be found; financial position unknown; errors and fraud go undetected; difficult to get loans/credit; problems with tax assessment; poor planning and decisions; loss of records.
(b)(i) Relevance: information is useful for the purpose and can influence users' decisions.
(ii) Comparability: information can be compared with other periods and other firms.
(iii) Consistency: the same methods and policies are used from period to period.
(iv) Reliability: information is free from error and bias, verifiable and faithfully represents events.
(c) Any two: based on historical cost; ignores non-monetary factors; depends on estimates and judgement; may contain errors or be window-dressed; different accounting policies hinder comparison; inflation distorts figures.
Three problems, four one-line definitions, two limitations.