CH5 - Conceptual Framework, Accounting concepts and conventions

Question 1

What is the objective of the conceptual framework?

Answer 1

Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions

Question 1

What is the IFRS Foundation Conceptual?

Answer 1

International accounting standards board

Question 2

What are Relevance in fundamental characteristics by IFRS of financial information mean?

Answer 2

Predictive value - helping users assessing the future of the business
Confirmatory value - helping users in confirming past predictions

Question 3

What does Faithful representation in fundamental characteristics by IFRS of financial information mean?

Answer 3

Complete - All information for a user to understand
Neutral - Unbiased
Free from errorW

Question 4

What does prudence mean?

Answer 4

Being cautious under situations of uncertainty

Question 5

What does Enhancing Characteristics in fundamental characteristics by IFRS of financial information mean?

Answer 5

Comparability - Consistent with other entities
Verifiability - Information can be checked
Timeliness - Supplied to users on time
Understandability - Understandable to those who have reasonable knowledge of business and accounting

Question 6

What are the underlying assumptions of the conceptual framework?

Answer 6

Going concern

Question 7

What does going concern mean?

Answer 7

Business that is operating and making profit

Question 8

The IAS 1 Presentation of Financial statements states that a set of financial statements comprises of? (5)

Answer 8

1. Statement of financial position
2. Statement of profit or loss
3. Statement showing either changes in equity or changes in equity except those arising with owners
4. Statement of cash flows
5. Accounting policies and explanatory notes

Question 9

What is the objective of the IAS 1 Presentation of Financial statements?

Answer 9

1. Ensure comparability by setting basic guidelines for presentation
2. Provide summary of accounting transactions for a period

Question 10

What does the IAS 1 Presentation of financial statements require?

Answer 10

Fair presentation of effects of transactions in accordance with conceptual framework?
AND
Entity should disclose if they comply with the international accounting standard

Question 11

What does it mean by statements being comparative by the IAS1?

Answer 11

Includes comparative information for all amounts including narratives and description

Where classification of items in the financial statement is amended, the comparative amounts should be reclassified

Ensure users of financial statements are able to compare position and performance company year on year

Question 12

What is the Accruals concept?

Answer 12

Requires that transactions and events are recognised when they occur, not when cash is received or paid for them

Question 13

What does Going concern mean?

Answer 13

Entity is viewed as continuing its operations for the foreseeable future (at least 12m)

Assumption that no intention of necessity to liquidateW

Question 14

What is a break-up basis?

Answer 14

Break-up basis’ is used in some countries to signify that an entity is at a stage where its assets are being realised or are about to be realised as part of the process of liquidating the entity.

Question 15

What is the materiality concept according to the IAS1

Answer 15

Information is material if its omission, misstatements or obscuring could influence the economics decisions of users taken on the basis of the financial statements

e.g. error of 10,000 would be immaterial

Question 16

What is a sundry expense?

Answer 16

Miscellaneous or one off payment

Question 17

What does offsetting mean?

Answer 17

reducing to net zero but IAS 1 Presentation of statements does not allow assets and liabilities or income and expenses to be offset by one another unless allowed

Question 18

What does it mean by historic cost convention?

Answer 18

Generally assets and liabilities are recorded in the statement of financial position at their historic cost e.g. amount paid

Question 19

What is the advantage of historic cost convention?

Answer 19

Removing subjectivity for estimation of value for an asset or liability

Question 20

Why is there a need for regulation?

Answer 20

1)Ensuring accounts are sufficiently reliable and useful.
2) Financial accounts are starting points for taxable profits
3) Annual financial statements are the main documents used for reporting to share holders

Question 21

How is accounting regulated?

Answer 21

Legislation - Companies Act 2006
Accounting concepts
Financial reporting Council FRC sets standards
Generally accepted accounting practice GAAP
Concept of fair presentation IAS1
Sustainability ISSB and FSB