Accounting Fundamentals

Question 1

Assets

Answer 1

Resources controlled by the entity resulting from past events and from which future economic benefits will flow

Question 2

Liabilities

Answer 2

Present obligations of the entity arising from past events and expected to be settled by a future outflow of economic benefits

Question 3

Equity

Answer 3

The residual interest of the entity’s assets after deducting the liabilities

Question 4

Income

Answer 4

Comprising both revenue and gains; revenue arises from the ordinary activities of the entity, and gains may or may not arise from the ordinary activities of the entity.

Question 5

Expenses

Answer 5

Includes expenses arising from the ordinary activities of the entity and losses that may or may not arise from the ordinary course of the entity’s business

Question 6

What are the four statements that are required under both IFRS and ASPE?

Answer 6

The statement of financial position (balance sheet under ASPE) details the assets, liabilities, and equity for the company as at a single point in time.

The statement of profit or loss and comprehensive income (income statement under ASPE) details revenue and expenses and calculates the net earnings for the period. Under IFRS, the section for other comprehensive income items is included in the statement of comprehensive income.

The statement of changes in equity reconciles the opening and closing balance for line items included in equity, such as share capital, retained earnings, reserves, and non-controlling interest. Under ASPE, only a statement of retained earnings is required, which reconciles the opening and closing balance of the entity’s retained earnings.

The statement of cash flows provides information on the nature of the entity’s cash flows for the period. The statement categorizes cash flows as operating, investing, or financing. Both IFRS and ASPE follow similar formats for this statement.

Question 7

Which of the following financial statements is NOT required under ASPE?

a) Statement of comprehensive income
b) Statement of cash flows
c) Statement of profit and loss
d) Statement of retained earnings

Answer 7

Option a) is correct. ASPE does not have comprehensive income; therefore, no statement of comprehensive income is required.

Question 8

Which of the following is an example of the qualitative characteristic of comparability of financial statements?

a) A new standard of accounting is applied retrospectively in the financial statements.
b) The information provided in the financial statements is at a level of detail appropriate for the users.
c) Users are able to confirm their expectations regarding the outcome of a decision made previously.
d) The transactions included in the financial statements are free from bias.

Answer 8

Option a) is correct. Applying the standards retrospectively allows for comparability between the current and previous years.

Option b) is incorrect. This is the enhancing characteristic of understandability. Financial statements must be of sufficient quality and clarity to allow reasonably informed users to understand the significance of the information provided in the statements. A contributing factor to understandability is to ensure that the level of detail provided is appropriate for the user.

Option c) is incorrect. Confirmatory value is a characteristic of relevance rather than comparability.

Option d) is incorrect. Neutrality, or freedom from bias, is a component of faithful representation.

Question 9

According to the IFRS framework for the preparation and presentation of financial statements, freedom from error is a component of which fundamental qualitative characteristic of financial statements?

a) Verifiability
b) Relevance
c) Materiality
d) Faithful representation

Answer 9

Option d) is correct. Faithful representation is a fundamental qualitative characteristic. The framework for the preparation and presentation of financial statements indicates that, to be faithfully represented, financial statements should have three characteristics: completeness, neutrality, and freedom from error.

Option a) is incorrect. Verifiability is an enhancing (not fundamental) qualitative characteristic that helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

Option b) is incorrect. To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present, or future events, or by confirming (or correcting) their past evaluations.

Option c) is incorrect. The relevance of information is affected by its nature and materiality. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.