Chapter 2

Question 1

What is the objective of financial reporting?

Answer 1

To communicate information that is
- useful to investors, creditors, and other users
- useful in making decisions about how to allocate resources

Question 2

What should general-purpose financial statements provide?

Answer 2

the most useful information possible to different kinds of users subject to cost/benefit considerations

Question 3

What determines if something is relevant qualitative of useful information?

Answer 3

it is capable of making a difference in a decision

Question 4

What is predictive value?

Answer 4

the capacity of financial information to assist users of financial statements in predicting future outcomes with reasonable reliability

Whether the information can be used to make informed forecasts about future financial performance

Question 5

What does it mean if something has predictive value?

Answer 5

helps users make predictions about past, present, and future events

Question 6

What are the four steps of making materiality judgements?

Answer 6

S1: Identify information that could make a difference to primary users

S2: Assess materiality using qualitative and quantitative factors

S3: Present the information in an organized way

S4: review statements to ensure everything is included and presented appropriately

Question 7

What are qualitative factors of materiality?

Answer 7

illegal acts, inadequate or inappropriate descriptions of accounting policy

Question 8

What factors must be taken into account when determining whether an item is material?

Answer 8

quantitative and qualitative factors

Question 9

What is materiality?

Answer 9

determines whether a discrepancy would impact a reasonable users decision making

If it would the information is material, if the information is irrelevant is is immaterial

Question 10

What is the concept of dynamic materiality?

Answer 10

Considers not only financial information but also information related to environmental social and governance matters

Question 11

What are materiality signatures?

Answer 11

Each company has a materiality signature which continues to evolve along changes in the business, industries, and societal views and norms

Question 12

How does dynamic materiality compare to financial reporting materiality?

Answer 12

Dynamic materiality considers a broader set of stakeholders, broader considerations and information needs (including ESG issues), and a longer time frame

Question 13

What does representational faithfulness mean?

Answer 13

it faithfully reflects or represents the underlying economic substance of an event or transaction

Question 14

How should representational faithfulness be communicated?

Answer 14

Transparent - shows the reality
Complete - includes all information with detail
Neutral - information doesn’t favour one side
Freedom from error - must be reliable, coming from good systems

Question 15

What are the three steps in ensuring relevance and representational faithfulness?

Answer 15

1) Identify the economic event or transaction
2) identify the type of information that would be relevant and can be faithfully represented
3) assess whether the information is available and can be faithfully represented

Question 16

What does comparability mean?

Answer 16

Information is measured and reported in a similar way - company to company and year to year

Question 17

What is verifiability?

Answer 17

Knowledgeable, independent users achieve similar results

Question 18

What does timeliness mean?

Answer 18

Information is available in sufficient time to influence decisions

Question 19

What is understandability?

Answer 19

information must be of sufficient quality and clarity so reasonably informed users can see its significance

Question 20

What are the three essential characteristics of assets?

Answer 20

represent a present economic resource - a right to use an asset that produces economic benefit or has the potential to produce economic benefits

Entity has control over the resource - the ability to decided how to use the asset and receive economic benefits through level ownership

Resource results from a past transaction or event

Question 21

What are the three essential characteristics of liabilities?

Answer 21

they represent a present duty or responsibility - there is no practical ability to avoid them

Entity is obligated to transfer an economic resource

Obligation results from a past transaction or event

Question 22

What are the three types of liability obligations?

Answer 22

Contractual or statutory requirements
Constructive - acknowledging a potential burden
Equitable - moral or ethical considerations

Question 23

What is equity?

Answer 23

an interest in an entity that remains after deducting liabilities from assets

Equity = Assets - Liabilities

This is also known as net worth

Question 24

Slide 22