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ACA- Accounting > Chapter 5- Conceptual Framework, accounting concepts + conventions > Flashcards

Chapter 5- Conceptual Framework, accounting concepts + conventions Flashcards

1
Q

What board is responsible for issuing International Accounting Standards?

A

IASB (in the form of IAS standards + IFRS standards)

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2
Q

Two areas that can help users identify the reporting entity’s financial strengths and weaknesses… (IASB’s Conceptual Framework)

A
  • Economic resources it controls
  • The claims on an entity’s resource (the entity’s liabilities)

(not management structure, past financial performance or demographic structure of local economy)

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3
Q

IASB’s Conceptual Framework says financial info is capable of making a difference in decisions if it has…

A

Predictive and confirmatory value

not comparative and historic value

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4
Q

According to the Conceptual Framework (from IASB) the objective of financial statements is to…

A
  • Provide financial info about reporting entity that’s useful to existing + potential investors, lenders + creditors in making decisions
  • To show the results of management’s stewardship of the resources entrusted to it

(not to provide a basis for valuing the entity, comparison of financial performance between entities operating in different industries OR assisting management and those charged with governance in making timely economic decisions about deployment of the entity’s resources)

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5
Q

Characteristics for info to be useful (IASB’s Conceptual Framework)

A

Fundamental characteristics:

  • Relevance (materiality is an aspect of this)
  • Faithful Representation

Enhancing characteristics:

  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
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6
Q

Financial statements are required to give a true and fair view but…

A

these are not defined in statue (IAS 1, instead they tend to be determined in courts of law/ on the facts)

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7
Q

IAS 1 Presentation of Financial Statements states that a set of financial statements comprises:

A
  • Statement of FP
  • Statement of P+L
  • Statement of cash flow
  • Statement of changes in equity (or changes in equity except those arising with owners)
  • Accounting policies + explanatory notes
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8
Q

For financial info to be useful it must be… (IASB’s Conceptual Framework)

A

relevant and faithfully represented

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9
Q

Objectives of IAS 1 Presentation of Financial statements

A
  • Purpose is to ensure comparability through prescribing the basis for presentation of general-purpose FS
  • Objective of FS is to provide a summary of accounting transactions for a period
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10
Q

IAS 1 requires FS to fairly present…

A

Financial position, financial performance and cash flow of entity

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11
Q

departure from IAS 1 requires…

A

disclosure in accounts with an explanation + estimate of financial impact

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12
Q

Accruals (matching) concept

A
  • Transactions + events are recognised when they occur not when cash is received/ paid for
  • Costs incurred in generating income are matched against revenue generated
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13
Q

Going concern concept requires that…

A
  • Entity is viewed as continuing its operations for the foreseeable future (at least 12 months)
  • assume there’s no intention/ necessity to liquidate or curtail materially its operations
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14
Q

Going concern concept means that assets…

A

do not need to be valued on a break-up basis (the value they could be sold separately at by the business if the business were to be liquidated)

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15
Q

If management do not believe going concern concept should apply, they need to disclose…

A
  • that they don’t believe it should apply
  • the basis on which accounts have been prepared
  • reasons why entity is not a going concern
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16
Q

Info is material if…

A

Its omission/ misstatement could influence economic decisions of users taken on the basis of financial statements. (according to IAS 1)

17
Q

If info is immaterial a specific disclosure requirement…

A

of an IFRS Standard need not be satisfied

18
Q

Materiality depends on…

A

size or effect of item judged in the particular circumstances of its omission/ misstatement

19
Q

Determining whether an item is material is…

A

subjective (a % is used as a rule of thumb). Decisions must be made in context

20
Q

Sundry expenses are…

A

small immaterial expenses all added together

21
Q

The offsetting rule by IAS 1 Presentation of financial statements

A

does not allow assets + liabilities OR income + expenses to be offset (deducted) from one another unless another IAS allows it

22
Q

Generally assets + liabilities are recording in SFP at their…

A

historic cost.
(Assets are recorded at amount of cash/ cash equivalents paid or the fair value of the considerations given to them) (Liabilities are recorded at the amount of proceeds received in exchange for the obligation)

23
Q

The accounting principle which, in times of rising prices, tends to understate asset values and overstate profits is…

A

Historic value

24
Q

advantage of historical cost accounting…

A

it removes subjectivity of estimating the value of an asset or liability (usually objective evidence of cost)

25
Q

5 reasons for regulation

A
  • Ensures accounts are sufficiently reliable + useful + timely
  • Financial accounts are used as the starting point for calculating taxable profits
  • FS are the main document used for reporting to shareholders about condition + performance of company
  • Stock markets rely on FS
  • International investors prefer info to be presented in a similar + comparable way
26
Q

Legislation affecting accounting + preparation of FS

A
  • Companies Act 2006 requires set formats + content
27
Q

Accounting concept affecting accounting + preparation of FS

A

Help where judgement is required

28
Q

FRS affecting accounting + preparation of FS

A
  • Clarify how to account for + present specific items in FS
  • FRC sets UK standards
  • IASB sets international standards
29
Q

GAAP affecting accounting + preparation of FS

A

set of accounting practices applied in a given country

30
Q

Concept of fair presentation

A
  • IAS 1 Presentation of FS requires FS to present info fairly
  • Companies Act 2006 requires FS to give a true and fair view
31
Q

Description of fair presentation (IAS 1 Presentation of Financial Statements)

A

The financial statements are reliable in that they faithfully reflect the effects of transactions, other events and conditions

32
Q

The auditor of James plc is insistent that great care is taken in estimating the amounts of accruals and prepayments each year.

This is justified primarily by which accounting concept?

A

Matching/ accruals

33
Q

Money measurement concept…

A

recognition of items on the basis of monetary amounts

ACA- Accounting (10 decks)

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