Conceptual Framework

Question 1

what is the conceptual framework

Answer 1

bedrock to base accounting standards on

Question 2

scope of conceptual framework

Answer 2

• general purpose of financial reporting
• going concern assumption
• elements of financial statements
• measurement
• presentation and disclosure

Question 3

primary users of financial report

Answer 3

existing/potential investors
existing/potential lenders and other creditors

Question 4

other users of financial reports

Answer 4

employees
government
customers

Question 5

qualities that asses usefulness of financial reports

Answer 5

Relevance
Faithful Representation
Comparability
Timeliness
Verifiability
Understandability

Question 6

what are the two fundamental qualities of financial statements

Answer 6

relevance
faithful representation

Question 7

what are the enhancing qualities of financial statements

Answer 7

comparability
timeliness
verifiability
understandability

Question 8

what makes information relevant

Answer 8

if it has predictive and confirmatory value

(i.e. accurate predictions that are confirmed the following year)

Question 9

what is material information

Answer 9

information that would have an impact on the accounts

Question 10

how is materiality determined

Answer 10

each company has their own threshold

usually % based on revenue or assets

Question 11

how can accounts have faithful representation

Answer 11

be complete
be natural (unbiased)
be free from error

Question 12

when an account is ‘free from error’ does this mean 100% accurate

Answer 12

no , estimates can be made
eg depreciation is an estimate

but free from material error

THIS IS ADDRESSED IN DISCLOSURE NOTE

Question 13

What does comparability mean

Answer 13

users can compare financial information
year on year
between entities

Question 13

how is comparability achieved

Answer 13

using same accounting standards for the same types of items

Question 14

what does verifiability mean

Answer 14

independent, knowledgeable observers are eligible to agree that the information provides faithful representation

Question 15

example of direct verification

Answer 15

cash count, inventory count

Question 16

example of indirect verification

Answer 16

models, processes, systems used to cross check

Question 17

what does timeliness refer to

Answer 17

must be made available to users in sufficient time to influence decisions

Question 18

how is understandability improved

Answer 18

presentation is:
clear
concise

Question 19

what are the underlying assumptions of the understandability quality

Answer 19

users should have reasonable knowledge and understanding of business and economic activity

Question 20

where does cost for financial reporting come from

Answer 20

company
then shareholders

Question 21

how must cost be considered

Answer 21

consider the cost of creating and providing the information and the benefit the users get from the information

technically should only be produced if cost<benefits

Question 22

what is the going concern basis

Answer 22

assumes that the entity will continue operations into the foreseeable future

i.e 12 months from date accounts are authorised for issues

Question 23

what is an asset

Answer 23

a present economic resource controlled by an entity as a result of past events which has potential to produce future economic benefits

Question 24

what is a liability

Answer 24

a present obligation of the entity to transfer an economic resource as a result of past events

Question 25

what is an equity

Answer 25

assets - liabilities

Question 26

what is income

Answer 26

increase in assets or decrease in liability that results in increase in equity

other than from shares, contributions from shareholders

Question 27

what is an expense

Answer 27

decrease in assets or increase in liability that results in a decrease in equity

other than dividends

Question 28

four measurement choices

Answer 28

historical cost
fair value
current cost
value in use

Question 29

what is historical cost

Answer 29

amount paid to acquire asset

settlement cost of liability

Question 30

what is fair value

Answer 30

amount obtained by selling less selling costs for an asset

market value of liabilty

Question 31

what is current cost

Answer 31

cost of replacing less depreciation of an asset

settlement cost at that time of a liability

Question 32

what is value in use

Answer 32

present value of future cash flows less disposal