Chapter 1 Flashcards
Objectives, Regulations, Character of FS, concepts and conventions.
Which of the following should be accounted for as capital expenditure?
A The annual cost of painting a factory floor
B The repair of a window in a building
C The purchase of a vehicle for re-sale by a car retailer
D Legal fees incurred on the purchase of a building
D - anything included in the purchasing of a NCA to get it up and running (except training costs - as said to not be guaranteed for more than a year) is capital expenditure
Which of the following items should be treated as revenue items in an entity’s financial statements?
(1) Payment of local property tax
(2) Purchase of premises
(3) Alteration of premises to configure them to be ready for use in the business
(4) External audit fee
Select one:
a. (1) and (2) only
b. (2) and (3) only Incorrect
c. (3) and (4) only
d. (1) and (4) only
Payment of local property tax - Revenue
Purchase of premises - Capital
Alteration of premises - Capital
Audit fee – Revenue
The correct answer is: (1) and (4) only
Ned is considering two issues in the course of preparing his financial statements.
Issue 1: Non-current assets are valued at cost less depreciation.
Issue 2: Expenses incurred but for which invoices have not yet been received are included in the financial statements.
Which accounting characteristic or principle is relevant to each of these issues?
Select one:
a. Issue 1: Verifiability; Issue 2 Accruals Incorrect
b. Issue 1: Accruals; Issue 2 Verifiability
c. Both issues: Verifiability
d. Both issues: Accruals
Non-current assets are valued at cost less depreciation = Accruals (depreciation matches cost to periods over which the asset is used)
Expenses incurred but for which invoices have not yet been received are included in the financial statements = Accruals
The correct answer is: Both issues: Accruals
4 Which of the following is an aspect of relevance, according to the IASB’s Conceptual Framework ?
A Neutrality
B Free from error
C Completeness
D Materiality
4 Correct answer(s):
D Materiality
Information’s relevance is affected by its materiality. A, B and C are all characteristics contributing to
information being a faithful representation of what it claims to represent.
5 According to the IASB’s Conceptual Framework, which of the following are enhancing qualitative
characteristics?
A Comparability, understandability, timeliness, verifiability
B Consistency, prudence, measurability, verifiability
C Consistency, reliability, measurability, timeliness
D Materiality, understandability, measurability, reliability
5 Correct answer(s):
A Comparability, understandability, timeliness, verifiability
This is set out in paragraph 2.23-2.36 of the IASB’s Conceptual Framework .
According to the IASB’s Conceptual Framework, information on which two of the following areas can
help users identify the reporting entity’s financial strengths and weaknesses?
A The economic resources it controls
B Its financial performance in the past
C The demographic structure of the local economy
D The claims on an entity’s resource (the entity’s liabilities)
E Its management structure
8 Correct answer(s):
A The economic resources it controls
D The claims on an entity’s resource (the entity’s liabilities)
The IASB’s Conceptual Framework states that information about the economic resources (A) and
claims (D) of an entity can help users to identify the reporting entity’s financial strengths and
weaknesses. That information can then be used to help users to assess the reporting entity’s liquidity
and solvency.
9 According to IAS 1, Presentation of Financial Statements which two of the following are objectives of
primary financial statements?
A To show the results of management’s stewardship of the resources entrusted to it
B To provide a basis for valuing the entity
C To provide information about the financial position, financial performance and cash flows of an
entity that is useful to a wide range of users in making economic decisions
D To facilitate comparison of financial performance between entities operating in different
industries
E To assist management and those charged with governance in making timely economic decisions
about deployment of the entity’s resources
9 Correct answer(s):
A To show the results of management’s stewardship of the resources entrusted to it
C To provide information about the financial position, financial performance and cash flows of an
entity that is useful to a wide range of users in making economic decisions
IAS 1, Presentation of Financial Statements provides the objective of financial statements. It states that
the objective of financial statements is to provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide range of users in making economic
decisions (C). In addition, it states that the financial statements also show the results of
management’s stewardship of the resources entrusted to it (A).
0 Information is relevant if it is capable of making a difference in the decisions made by users.
According to the IASB’s Conceptual Framework, financial information is capable of making a
difference in decisions if it has which of the following?
(1) Predictive value
(2) Comparative value
(3) Historic value
(4) Confirmatory value
A 1 and 3 only
B 2 and 4 only
C 1 and 4 only
D 2 and 3 only
10 Correct answer(s):
C 1 and 4 only
Financial information can make a difference to decisions if it has predictive value (it can be used to
predict future outcomes), confirmatory value (it provides feedback about previous evaluations) or
both.
11 The accounting principle which, in times of rising prices, tends to understate asset values and
overstate profits, is:
A going concern
B accruals
C consistency
D historical cost
11 Correct answer(s):
D historical cost
The historical cost convention will understand asset values as the cost of assets is determined at the
date of purchase. This in turn results in higher profits because depreciation is lower.
READ QUESTION
12 Which of the following statements about accounting concepts and the characteristics of financial
information is correct?
A Financial statements are required to give a true and fair view. These terms have clear definitions
which are included in IAS 1, Presentation of Financial Statements.
B The historical cost concept means that only items capable of being measured in monetary terms
can be recognised in financial statements.
C It may sometimes be necessary to exclude information that is relevant and reliable from financial
statements because it is too difficult for some users to understand.
D A specific disclosure requirement of an IFRS Standard need not be satisfied if the information is
immaterial.
12 Correct answer(s):
D A specific disclosure requirement of an IFRS Standard need not be satisfied if the information is
immaterial.
Disclosures are not required if the information they provide is immaterial. While financial statements
are required to give a true and fair view, these terms are not defined in statute, they tend to be
determined in courts of law or on the facts (A). Recognition of items on the basis of monetary
amounts is the money measurement concept, not the historical cost concept (B). Items should not be
excluded on the basis of being difficult to understand (C).
13 Listed below are two comments on accounting conventions.
(1) According to the IASB’s Conceptual Framework , financial information must be either relevant or
faithfully represented if it is to be useful.
(2) Materiality means that only items having a physical existence may be recognised as assets.
Requirement
Which, if either, of these comments is correct?
A 1 only
B 2 only
C Both of them
D Neither of them
13 Correct answer(s):
D Neither of them
(1) Information must be both relevant and faithfully represented to be useful.
(2) Materiality concerns whether an item in the financial statements can influence users’ decisions;
there is no absolute amount or specific characteristic that makes an item material.
19 Which of the following statements is correct?
A The ICAEW Code of Ethics applies to its members only.
B The ICAEW Code of Ethics applies to its members and employees of member firms only.
C The ICAEW Code of Ethics applies to its members, employees of member firms and ICAEW
students.
D The ICAEW Code of Ethics applies to its members, employees of member firms, ICAEW students
and all other members of UK accountancy bodies.
19 Correct answer(s):
C The ICAEW Code of Ethics applies to its members, employees of member firms and ICAEW
students.
It also applies to affiliates and where applicable, member firms.
20 Which of the following statements best describes ethical guidance in the UK?
A Ethical guidance provides a set of rules which must be followed in all circumstances.
B Ethical guidance is a framework containing a combination of rules and principles, the application
of which is dependent on the professional judgement of the accountant based on the specific
circumstances.
C Ethical guidance provides a set of principles which can be applied at the discretion of the
accountant.
D Ethical guidance is a series of legal requirements.
20 Correct answer(s):
B Ethical guidance is a framework containing a combination of rules and principles, the application
of which is dependent on the professional judgement of the accountant based on the specific
circumstances.
Although there are some specific ‘rules’, the majority of ethical guidance is in the form of principles,
the spirit of which should be followed by the accountant.
