The First Q,Q - Summarization

[Hamdy Hafez]

The first Q,Q – summarization

Ok, every body we will do like the F8 Bit as hereunder link
http://getthroughguides.co.uk/forum/showthread.php?t=1858

in other word we will summarize the first Q,Q with its answers (without chatting) in order to concentrate only on our answers ( as a lot of members recommend here)


so Dear F7 moderator we need your help here

We need this thread to be restricted as just Quiz & answers, so can we transfer (cut any post) or any other chatting to the hereunder link (F7 Study Session for Dec 08)

http://getthroughguides.co.uk/forum/showthread.php?t=1761
thanks in advance

[Hamdy Hafez]

so the question was


The first quick quiz

Explain what is meant by faithful representation and how it enhances reliability.

[Hamdy Hafez]

so the first answer to Quick Quiz 1 was by Zbianca


Information in financial statements that is faithfully represented should be presented in accordance with their substance and not merely their legal form.

Therefore it enhances reliability in such a way that reliable information is faithfully represented.

[Hamdy Hafez]

Answer 2 was by Tauqeer Hayat


The framework should state that, in order to provide a faithful presentation, financial reporting should be based on suffient, supporting evidence that preferably is generated by systems that have effective internal control. Managment is responsible for the fair presention of FS that reflect the nature and operations of entity. In representing that the FS are fairly presented in confirmity with generally accepted accounting principles, managment implicity or explicity make assertions regarding the recognition, measurement, presentation and disclosure of information in the financial statements and related disclosures.

[Hamdy Hafez]

Answer 3 was by juliana


sorry for my late submission
Financial statements are the only reliable indication of the financial position of a company/firm that is produced and used by various parties for investment decisions as well as advisory decisions.Financial statements are the main reference tool used and hence they need to be prepared faithfully meaning that they should be free from bias and only contain relevant reliable and complete infomation to the users. In order to achive that financial statements have to be prepared under the necessary regulations and governance. :unsure:

[Hamdy Hafez]

Answer 4 was by esoluyemo


This simply means that the financial statement should be truthful.

Faithful Representation is one of the characteristics of Reliability.

In formation is reliable when it is free from material error and bias and consider to be a faithful representation of the underlying transactions.

[Hamdy Hafez]

and finally by our moderator veda


Faithful representation along with substance over form, neutrality, prudence, completeness forms reliable financial statements.
The transactions or events disclosed in the financial statements must be represented faithfully.

The financial statements to be represented faithfully should be
 Free from bias or lack of neutrality
 Identify the transactions
 Apply the respective measurement techniques
 Apply presentation techniques

Information has the quality of reliability when it is free from bias, material errors and the information is represented faithfully so that it could be depended upon by the users.

[Hamdy Hafez]

the perfect answer according to the F7 examiner's veiw




Answer

Faithful representation The Framework states that in order to be useful, information must be reliable and the two main components of reliability are;

1) freedom from material error and
2) faithful representation.

The Framework describes faithful representation as where the financial statements (or other information) have the characteristic that they faithfully represent the transactions and other events that have occurred.
Thus a balance sheet (statement of financial position) should faithfully represent transactions that result in assets, liabilities and equity of an entity.
Some would refer to this as showing a true and fair view.
An essential element of faithful representation is the application of the concept of substance over form. There are many examples where recording the legal form of a transaction does not convey its real substance or commercial reality. For example
"an entity may sell some inventory to a finance house and later buy it back at a price based on the original selling price plus a finance cost."
Such a transaction is really a secured loan attracting interest costs. To portray it as a sale and subsequent repurchase of inventory would not be a faithful representation of the transaction. The ‘sale’ would probably create a ‘profit’, there would be no finance cost in the income statement and the balance sheet would not show the asset of inventory or the liability to the finance house – all of which would not be representative of the economic reality. A further example is that an entity may issue loan notes that are (optionally) convertible to equity. In the past, sometimes management has argued that as they expect the loan note holders to take the equity option, the loan notes should be treated as equity (which of course would flatter the entity’s gearing). In some cases transactions similar to the above, particularly off balance sheet finance schemes, have been deliberately entered into to manipulate the balance sheet and income statement (so called creative accounting). Ratios such as return on capital employed (ROCE), asset turnover, interest cover and gearing are often used to assess the performance of an entity. If these ratios were calculated from financial statements that have been manipulated, they would be distorted (usually favourably) from the underlying substance. Clearly users cannot rely on such financial statements or any ratios calculated from them.