Chapter 2: Qualitative Characteristics & Accounting Concepts

Question 1

What is the Malaysian Accounting Standard Board (MASB)?

Answer 1

Standardize and improve accounting practices by issuing and reviewing accounting standards. All standards issued are called the Malaysian Financial Reporting Standards (MFRS).

The Conceptual Framework for Financial Reporting among others lays out the qualitative characteristics of useful financial information and relevant accounting assumptions.

Question 2

What are the qualitative characteristics of financial information?

Answer 2

• Relevance
• Faithful representation

Question 3

What are the fundamental qualitative characteristics of financial information?

Answer 3

RELEVANCE
Information is relevant when it influences the decision made by the users.
- Predictive value – helps to evaluate past, present or future events.
- Confirmatory value – provides feedback to confirm past evaluations.
- Materiality – an item is material when it can influence the decision made by the users

FAITHFUL REPRESENTATION
Factual and portray true events.
- Complete – financial information should disclose all relevant information.
- Neutral – free from bias, does not favor one user over another.
- Free from error – no material errors or omissions.

Question 4

State and explain the enhancing qualitative characteristics of financial information.

Answer 4

• Comparable – comparable with other companies or previous period. Consistency helps to achieve comparability.
• Verifiable – must be able to be proven.
• Timeliness – information is available to users in time.
• Understandability – information should be presented in a manner that is easily understandable.

Question 5

State and explain the accounting assumptions.

Answer 5

Going concern assumption.
- Business is assumed to continue operation for the foreseeable future.
- Business is not expected to be dissolved in near future.

Question 6

State and explain the accounting concepts.

Answer 6

1. Accruals
   Revenues are recognized when it is earned even when cash is not yet received.
   Expenses are recognized when it is incurred even when cash is not yet paid.
2. Historical cost
   Assets must be recorded at their cost.
   Cost is a reliable value because it is measurable, a fact that can be easily verified.
3. Economic entity or business entity
   A business is treated as separate from its owner.
   Business activities must be kept separate from the activities of the owner.
   The records of a business are limited to transactions affecting the business only.
4. Money measurement
   Only transactions that can be expressed in terms of money will be included in the accounting records.
5. Periodicity
   Economic activities can be divided into regular time periods; Monthly, quarterly, half-yearly, yearly basis.
6. Matching
   Expenses to be matched with revenues in the same period in which revenues are earned.
7. Dual aspect
   Every business transaction has a dual effect.
   It affects at least two different accounts.
8. Realization
   Revenue is recorded when it is realized.
   Sales are recognized when goods are delivered to customers or services are rendered.