Chapter 1

Question 1

Objective of financial reporting/purpose of financial statements?

Answer 1

“To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity”.

Question 2

Users of financial statements? (8)

Answer 2

1 investors
2 lenders
3 government
4 suppliers
5 general public
6 management, employees, trade unions
7 competitors
8 customers

Question 3

Underlying assumptions? (2)

Answer 3

1 Going concern
2 accruals basis

Question 4

Accounting concepts? (4)

Answer 4

1 Business entity
2 materiality
3 prudence
4 consistency

Question 5

Fundamental characteristics of useful financial information? (2)

Answer 5

1 Relevance
2 faithful representation

Question 6

Enhancing characteristics of useful financial information? (4)

Answer 6

1 Comparability
2 verifiability
3 timeliness
4 understandability

Question 7

Information is relevant if? (2)

Answer 7

1 capable of making a difference in the decision making process
2 has predictive or confirmatory value

Question 8

Information is faithfully representative if? (2)

Answer 8

1 It corresponds to the effect of transactions or events
2 is complete, neutral and free from error as far as possible

Question 9

Accounting equation?

Answer 9

Assets = Liabilities + Equity

Question 10

Definition of ‘asset’?

Answer 10

“A present economic resource controlled by the entity as a result of past events. An economic resource that has the potential to produce economic benefits”.

Question 11

Definition of ‘liability’?

Answer 11

“A present obligation of the entity to transfer economic resources as a result of past events”.

Question 12

Definition of ‘income’?

Answer 12

“Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims”.

Question 13

Definition of ‘expense’?

Answer 13

“Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims”.

Question 14

Definition of ‘equity’?

Answer 14

“The residual interest in the assets of the entity, after deducting all its liabilities”.

Question 15

What is the purpose of The Conceptual Framework? (3)

Answer 15

1 Assist in the development of future IFRS and the review of existing standards by setting out the underlying concepts.

2 promote harmonisation of accounting regulation and standards by reducing the number of permitted alternative accounting treatments.

3 Assist the preparers of financial statements in the application of IFRS, which could include dealing with an accounting transaction for which there is not (yet) an accounting standard.

Question 16

What does the Conceptual Framework provide? (4)

Answer 16

1 The objective of financial reporting.

2 The main users of financial statements.

3 The underlying assumptions on which all statements should be prepared.

4 The qualitative characteristics of useful financial information.