7) The conceptual framework

Question 1

Qualitative characteristics of financial information (2 Fundamental and 4 Enhancing) - List

Answer 1

Fundamental: Relevance, Faithful Representation (completeness, neutrality, free from error)
Enhancing: Comparability, Verifiability, Timeliness, Understandability

Question 2

Describe the two methods of calculating operating cash.

Answer 2

Indirect - take profit and adjust for non cash items
Direct - analyse cashbook for cash received and paid

Question 3

Operating cash - direct method (proforma)

Answer 3

Cash received from customers (Less) Cash paid to suppliers (Less) Cash paid to employees (Less) Other cash payments for expenses = Cash generated from operations

Question 4

What are the 2 methods of measurement used in financial statements?

Answer 4

Historical cost, and Current Value

Question 5

List the 3 approaches to calculating “current value” in the context of measurement in financial statements.

Answer 5

Fair value (price received if sold now), Value in use (present cashflows/benefits generated from use + cashflow from disposal), Current cost (current cost to acquire + transaction costs)

Question 6

What is capital maintenance?

Answer 6

The practice of “maintaining” capital so that profit remains realistic and dividends are not overpaid in times of changing prices or productivity.

Question 7

What are the two concepts of capital maintenace?

Answer 7

Financial (set aside profits to preserve value of shareholder funds - in monetary terms or based on constant purchasing power)
Physical (set aside profits in order to allow the business to continue to operate at current levels of activity. In practice, this tends to mean adjusting opening capital by specific price changes)

Question 8

Under what circumstances can you not value an asset at “Fair value”?

Answer 8

If it is a specialised piece of equipment. Fair value can only be determined for use in financial statements for general equipment for which a fair value would be fairly easily determined.