Chapter 2: Financial statements for decision-making

Question 1

Assets

Answer 1

Resources controlled by the entity as a result of past transactions or events from which future economic benefits are expected to flow to the entity

Question 2

Liabilities

Answer 2

Present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow of resources from the entity

Question 3

Equity

Answer 3

The residual interest of the owner/s in the assets (less liabilities) of the entity

Question 4

Income

Answer 4

Increases in economic benefits in the form of inflows or enhancements of assets or decreases of liabilities that results in equity, other than those relating to equity participants

Question 5

Revenue

Answer 5

Income that arises in the course of ordinary activities of an entity

Question 6

Gains

Answer 6

Incomes that does not usually arise in the course of ordinary activities of an entity. E.g. profit from sale of motor vehicle.

Question 7

Expenses

Answer 7

Decreases in economic benefits in the form of outflows or incurrence’s of liabilities that result in decreases in equity, other than those relating to equity participants.

• Consumed in the current period
• Recognised in the period in which the consumption of costs can be measured.

Question 8

Assumptions of financial statements

Answer 8

Accounting entity assumptions: Identify clearly the boundaries of the entity being accounted for

Accrual basis assumption: The effects of all transactions and events are recognised when they occur

Going concern assumption: The entity will continue to operate in the future

Period assumption: Profit is determined for particular periods of time in order to be comparable

Question 9

Qualitative characteristics of financial statements

Answer 9

Relevance: Information is useful for decision-making

Reliability: Information presented faithfully, without bias or undue error

Comparability and consistency: Users can identify similarities in and differences between two sets of economic data

Understandability: Expect a reasonable knowledge of business and economic activity and financial accounting

Materiality: The extent to which omission or misstatement would be misleading

Benefits and cost: Benefits or providing information must justify cost

Question 10

Accounting Equation

Answer 10

Assets = Liabilities + Equity

Question 11

Cost of purchase includes

Answer 11

• Purchase price
• Custom duties
• Import duties
• Insurance of goods
• Modification costs