Chapter 1 - Purpose Of Financial Statements

Question 1

Statement of profit or loss

Answer 1

Shows income and expenses for the accounting period

Question 2

Statement of financial position

Answer 2

Shows assets, liabilities and equity at a particular date

Question 3

Statement of cash flows

Answer 3

Reflects elements of the statement of comprehensive income together with the changes to the elements shown on the statement of financial position.

Question 4

Income

Answer 4

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Question 5

Expenses

Answer 5

Decreases in economic benefits during the accounting period in the form of outflows or depletion of assets or occurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Question 6

Profits

Answer 6

Increases in equity not resulting from contributions from equity participants

Question 7

Losses

Answer 7

Decreases in equity not resulting from distributions to equity participants

Question 8

Equity participants

Answer 8

Shareholders

Question 9

The 5 main elements of financial statements

Answer 9

Assets
Liabilities
Equity
Income
Expenses

Question 10

Matters dealt with in the framework (7)

Answer 10

1. OBJRCTIVE (of financial statements)
2. (Underlying) ASSUMPTION
3. QUALITATIVE CHARACTERISTICS (of financial statements)
4. DEFINITION (of elements of financial statements)
5. RECOGNITION (of elements of financial statements)
6. MEASUREMENT (of elements of financial statements)
7. CONCEPTS (of capital and capital maintenance)

Question 11

Qualitative characteristics of Financial statements

Answer 11

fundamental: relevance and faithful representation

Enhancing: comparability, verifiability, timeliness and understandability.

Question 12

Relevance (definition)

Answer 12

Financial information is regarded as relevant if it is capBle of influencing the decision of users

Question 13

Faithful representation (definition)

Answer 13

Financial information must be complete, neutral and free of error,

Question 14

Comparability (definition)

Answer 14

Possible to compare an entity over time with similar information about other entities.

Question 15

Verifiability (definition)

Answer 15

Provides assurance to users that it is both credible and reliable

Question 16

Timeliness

Answer 16

Provided to users within a timescLe suitable for their decision making purposes

Question 17

Understandability (definition)

Answer 17

Understandable to those that might want to review and use it. Facilitated through appropriate classification, characterisation and presentation of information.

Question 18

Conceptual framework

Five elements of financial statements

Answer 18

1. Assets
2. Liabilities
3. Equity interest
4. Income
5. Expenses

Question 19

Asset (definition)

Answer 19

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

Question 20

Controlled by the entity (definition)

Answer 20

The ability to obtain economic benefits from an asset throughout or sale
Includes ability to restrict other peoples access to an asset.
Control does not require ownership of the asset

Question 21

Liability (definition)

Answer 21

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

Question 22

Equity interest (definition)

Answer 22

Residual interest in assets of the entity after deduction all its liabilities .

(What is left when all debts have been settled - net assets of the business)

Question 23

Accounting equation

Answer 23

Assets - liabilities = capital + profits - drawings

Assets = equity + liabilities