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The finance costs are paid in arrears and may not have been correctly accrued at the year end resulting in understated accruals and finance costs.
If finance costs are not correctly accrued then it could lead to misstated accruals and misstated finance costs. So why is it written understated accruals and understated finance costs.
If it was written that finance costs were not accrued at year end instead of correctly accrued then it would lead to understated accruals and understated finance costs. Is it correctTo accrue finance costs at the end of the year, the entry would be:
Dr Finance cost (expense in SoPL) 500 (say)
Cr Accrual (liability in SoFP) 500If this entry is not made, the omission of 500 expense means it is understated – similarly for the liability.
The finance costs are paid in arrears and may not have been correctly accrued at the year end resulting in understated accruals and finance costs.
If finance costs are not correctly accrued then it could lead to misstated accruals and misstated finance costs. So why is it written understated accruals and understated finance costs in the above statement.
Have you even read my reply? Is it the term “in arrears” that you do not understand?
If finance costs are not correctly accrued then accruals and finance costs could be misstated.
In the book it is written that the finance costs are paid in arrears and may not have been correctly accrued at the year end resulting in understated accruals and finance costs.
Why in the book it is written understated instead of misstated
An “understated” amount means stated at less than it should be – i.e. the amount is incomplete in some way e.g. an omission (as I have illustrated) or could simply be recording $50 instead of $500
An “overstated” amount means stated at more than it should be – e.g. due to double counting/recording the same transaction twice or incorrectly recording a transaction of $50 as $500
“misstatement” doesn’t tell you “which way” – under? or over? The examiner expects candidates to be specific in identifying whether a misstatement is under or over whereever it is possible to determine this.
The finance costs are paid in arrears and may not have been correctly accrued at the year end resulting in understated accruals and finance costs
The finance costs are paid in arrears and may not have been correctly accrued at the year end resulting in misstated accruals and finance costs
Which of the above two statements is correct and why
Both are correct statements – but “understated” is more accurate – it is saying that the amount of accruals and finance costs are recognised/recorded at a lesser amount than they should be
The second statement is saying that they are at a different amount – it doesn’t tell you specifically whether it is more or less
The finance costs are paid in arrears and may not have been accrued at the year end resulting in understated accruals and finance costs
The finance costs are paid in arrears and may not have been correctly accrued at the year end resulting in understated accruals and finance costs
Which statement is better
In the first statement the word correctly has been removed
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