Question

Explain the principles of:  Accounting  Financial statements  Cash flow Answer in 250-300 words for each item. (Please provide a written answer not some picture)

Answer 1

Accounting principles are those regulations of conduct that is adopted by the accountants universally while recording the accounting transactions. These can be broadly classified as:

1) Accounting Concepts: The term 'concepts' is inclusive of basic conditions on which the science of accounting is based. These are:

-- Dual aspect concept: Dual aspect concept is underlying basis for double entry accounting system.

-- Separate entity concept: The sole proprietorship and owner are categorised to be one entity, however for accounting they are considered to be two separate entities

-- Going concern concept: It is based on the assumption that a company will continue to exist long enough to carry out its goals.

-- Money measurement concept: Only transactions that can be expressed in money are recorded.

-- Cost concept: The prices at which items were sold and brought are used for valuations.

-- Accounting period concept: It refers to the period for the financial statements are prepared.

-- Matching concept: It states to use the accrual basis of accounting, thus expenses must be matched with revenues

-- Realization concept: The concept states that revenue can only be recognized after it has been earned.

2) Accounting Conventions

Accounting conventions is inclusive of traditions that guide the accountant while communicating the information. These are:

-- Convention of conservatism: It states that accountant to select the alternative that will result in less asset amount and/or less net income

-- Convention of full disclosure: It requires that companies reveal every aspect of the functioning in financial statements.

-- Convention of consistency: It states to use same accounting principles, when once used must be used regularly on a period to period basis for preparing financial.

-- Convention of materiality: Only those transactions will be considered which have material effect on financial status of the company

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Cash flow estimation refers to an assessment on the investment decisions of any kind. For evaluating the decisions on investment there are few principles of cash flow estimation which are discussed as below:

-- Separation Principle: The Separation Principle is applied to determine the project cash flows of a specific project. It is very vital part in the capital budgeting. Before initiating a new project, it is vital that that the company properly estimates the inflow and outflow of cash. There are numerous methods which are applied to determine the exact figure of the cash flow in project and Separation Principle among those methods

-- Incremental Principle: The incremental principle is applied to determine the project's profit potential. According to Incremental Principle theory, a project would be sound when it earns the total profit more than total cost

-- Post-Tax Principle: Post Tax Principle is among those basic principles of cash flow estimation that are applied to determine the project cash flows with accuracy. After computations of tax these are suggested by the Post Tax Principle for the cash flow n project. There are only few businesses that often neglect the tax payment while measuring the project cash flow. Such businesses often would cover the fault by applying the discount rate.

-- Consistency Principle: Consistency Principle is among four major principles that are applied for estimation of the project cash flows. As per the principle, consistency in the cash flows is very important. Moreover the principle of consistency includes the applicable discount rates on the cash flows that need to be maintained. The two vital factors that are connected to the Consistency Principle include the inflation and the investor group.