Chapter 1

Question 1

Asset

Answer 1

A resource controlled by the entity, as a result of past events, from which future economic benefits are expected to flow to the entity.

Question 2

Liability

Answer 2

A present obligation of the entity as a result of past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 3

Owners Equity

Answer 3

The residual interest in the assets of the entity after the deduction of liabilities.

Question 4

Revenue

Answer 4

An inflow of economic benefits (or saving in outflows) in the form of an increase in assets (or decrease in liabilities) that increases owners equity, except for capital contributions by the owner.

Question 5

Expenses

Answer 5

An outflow or consumption of economic benefits (or reduction in inflows) in the form of a decrease in assets (or increase in liabilities) that reduces owners equity, except fro drawings by the owner.

Question 6

Conservatism

Answer 6

Losses should be recorded when probably, but gains are only recorded when certain. This ensures that assets or revenues are not overstated and liabilities and expenses are not understated.

Question 7

Historical Cost

Answer 7

Transactions are to be recorded at their original purchase price and therefore can be verified by source documents.

Question 8

Entity

Answer 8

The business is to remain a seperate entity from the owner and other entities and its records should be kept on this basis.

Question 9

Reporting Period

Answer 9

The life of the business is separated into periods that reflect the time in which each transaction occurred.

Question 10

Monetary Unit

Answer 10

All information that is reported and recorded must be in the currency of the country that the business operates in and thus where the reports are prepared.

Question 11

Consistency

Answer 11

The business needs to use the same accounting methods every reporting period so that comparisons can be made from one reporting period to the next.

Question 12

Going Concern

Answer 12

The life of the business is expected to be continuous and therefore the records should be kept on this basis.

Question 13

Relevance

Answer 13

Reports of the business should only contain information that is useful for decision making.

Question 14

Reliability

Answer 14

Reports of the business should only contain information that can be verified by source documents. This ensures reports are evidenced and free from bias.

Question 15

Understandability

Answer 15

Reports of the business should be presented in a fashion so that the reader can comprehend the information and its meaning.

Question 16

Compatibility

Answer 16

Reports of the business should be able to be compared to one another after each reporting period. This can be done through the use of consistent accounting methods.