Chapter 27

Question 1

Objective stating that financial statements should be prepared in a way that a person who is willing to study the information and who has a reasonable knowledge of finance and business is able to comprehend them

Answer 1

Objective of understandability

Question 2

Ensures that financial statements are presented in a way that a person with a reasonable knowledge of economics, business and finance is able to understand it

Answer 2

Understandability

Question 3

Objective ensuring that financial information can be verified and used consistently by interested parties with the same results. Information should be trustworthy and materially accurate to meet this objective

Answer 3

Objective of reliability

Question 4

If financial statements are this then the information they contain is timely and useful for decision making

Answer 4

Relevant

Question 5

What are the four accounting policies?

Answer 5

Comparability, relevance, reliability and understandability

Question 6

For accounting statements to be this, accounting standards, principles and policies should be applied consistently from one accounting period to the next and from one region to another

Answer 6

Comparable

Question 7

What are the two questions you can ask to ensure that the objective of comparability has been adhered to?

Answer 7

1) Can the business’ financial statements of the present year be compared to those of previous years?
2) Can the business’ financial statements be compared to those of similar businesses?

Question 8

What are the five questions you can ask to ensure that the objective of reliability has been adhered to?

Answer 8

1) Can the information in financial statements be depended upon as being a faithful representation of the underlying transactions and events?
2) Can the information be independently verified?
3) Is the information free from bias?
4) Is the information free from material errors?
5) Is the information prepared with suitable caution being applied to any necessary judgements and estimates?

Question 9

What are the five questions you can ask to ensure that the objective of reliability has been adhered to?

Answer 9

1) Does the information contained in the financial statements reflect the substance of the transactions and events that have taken place during the financial year?
2) Can the information be verified, for example by an independent auditor?
3) Is the information neutral?
4) Is the information free from errors of significance?
5) Has prudence been used to make estimates and judgements when the information was based on uncertain criteria?

Question 10

What are the four questions you can ask to ensure that the objective of understandability has been adhered to?

Answer 10

1) Is the information in the financial statements provided clearly, concisely and completely to help users’ understanding?
2) Do the users have sufficient knowledge of business, the economy and accounting?
3) Are the users being diligent when studying the statements?
4) Is any information omitted because the business thought it was too complex?