Chapter 1: Introduction and The Conceptual Framework

Question 1

What does accounting compromise of

Answer 1

Identify - the nature of transactions.
Measure - the value of transactions.
Record - transactions.
Report - financial results.

Question 2

What is the purpose of accounting

Answer 2

(1) To provide financial information (2) regarding the economic activities (3) of an entity (4) to the users of financial statements

Question 3

What is the difference between financial position and financial performance as an expression of financial results

Answer 3

Financial position is the state of affairs at a specific point in time.

Financial performance is the indication of performance regarding profit or loss for a specific period.

Question 4

What are the two domains of accounting

Answer 4

Financial accounting and management accounting

Question 5

The preparation of the formal financial statements for study by external users is which domain of accounting

Answer 5

Financial accounting

Question 6

Explain what is management accounting

Answer 6

It is the preparation of financial reports (for internal users) that comply with specific requirements for the different departments in an entity which is then used by internal users such as the people employed by the business who require this information to perform their daily duties

Question 7

Why does conceptual framework exist

Answer 7

(1) To limit differences between financial statements of different entities. (2) To eliminate undesired alternatives. (3) To avoid being too strict. (4) To achieve faithful presentation.

Question 8

What is the objective of the conceptual framework.

Answer 8

To provide financial information about the business (reporting entity) which is useful to existing and potential investors, lenders and other creditors.

Basically to impress potential investors

Question 9

What are the advantages of a sole proprietor

Answer 9

The owner is independent.

The owner is directly involved with the customers.

The owner can supervise staff closely.

Decisions are made quickly.

Businesses can adapt easily.

Question 10

What are the limitations or disadvantages of sole proprietors

Answer 10

The owner has limited access to capital.

The owner is personally liable is not a legal entity.

The owner may not be versatile or skilled enough to handle all responsibilities.

There is no continuity should the owner pass away.

Question 11

Advantages of partnerships

Answer 11

New partners bring in additional capital and can introduce new ideas.

Partners can specialise in different areas.

Increased capital and division of labour between partners can lead to expansion of the business.

Question 12

Limitations or disadvantages of partnerships

Answer 12

If partnership is unable to pay debts, partners will have to contribute from their own personal assets. If the other partner cannot contribute the other one has to cover for the shortfall.

Continuity ends the moment a partner withdraws or passes away. A new one can be formed if they remaining partners wish to continue with the business

Question 13

Advantages of a close corporation

Answer 13

Registration is simple and affordable as there are only a few regulations.

There are no legal complications; audited financial statements are not required by law.

Continuity of a close corporation is not linked to the life of its members.

Income is exempt from normal income tax.

Question 14

Limitations or disadvantages of close cooperation

Answer 14

The maximum number Of the members allowed is 10 and could hamper the growth of the corporation.

A member of a close corporation can be held personally liable for the debts of the entity if a member acts carelessly or without skill.

It is not possible to sell a close corporation it can be converted to a company which is time-consuming.
It is taxed as if it were a company.

Company tax rates are significantly higher than personal tax rates

Question 15

What are the accounting and disclosure requirements for a company

Answer 15

To report on the financial affairs to the shareholders annually.

A member of the public accountants and auditors board must audit the financial statements.

Financial statements must comply with international accounting standards.


Question 16

Advantages of companies

Answer 16

A public company can raise capital easily by offering shares to the public.

Shareholders do not have to be directly involved in running the business which further facilitate the raising of capital.

Separate legal entity. The continuity is not linked to the life of its shareholders therefore limited liability exists

Transfer of ownership in a public company is simple (purchased through broker)

Question 17

Limitations or disadvantages of companies

Answer 17

A company is difficult and expensive to establish as there are many formalities to be followed.

A private company is forbidden from offering its shares to the public since it may not be listed on the JSE.

A company is subject to a constant rate of tax irrespective of the level of income profits.

A company is subjected to double taxation, firstly in the form of normal company tax and secondly in the form of dividend tax at shareholder level

Question 18

Name and explain the fundamental qualitative characteristics

Answer 18

Relevance

Faithful representation
Information must be:
- complete
- neutral
- free from errors

Question 19

Name and explain the enhancing qualitative characteristics

Answer 19

Comparability; Statements must be represented in a consistent manner.

Verifiability; Users should be able to verify that information contained in the financial statements faithfully represent the state of affairs in the entity.

Timeliness; It is important that financial statements are released to users timeously to enable them to make decisions while the information is still relevant.
The longer it takes for information to become available the less useful it will be.

Understandability; The users of financial statements must be able to understand the financial statements. Information must not be excluded solely because it may not be understood by some users

Question 20

What comprises of the financial statement and name them

Answer 20

It is comprised of four reports and explanatory notes.

Statement of financial position.
Statement of profit or loss.
Statement of changes in equity. Statement of cash flow
Explanatory notes

Question 21

What are the elements of financial statements (also known as classification of accounts that belong to the general ledger)

Answer 21

Assets, expenses, liabilities, income and equity

Question 22

Explain the accrual concept

Answer 22

Accrual concept implies that transactions are recorded when they occur and not win the unnecessarily paid for or received

Question 23

What is the underlying assumption

Answer 23

Also known as the going concern concept; It is assumed that an entity will exist for the foreseeable future. This means that there is continuity of the company.