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F1 > Conceptual Framework > Flashcards

Conceptual Framework Flashcards

1
Q

What is Conceptual Framework and what is it’s purpose

A
  • Provide guidance and consistent concepts for IFRS from IASB
  • Provide guidance for accounting policies where no standard applies
  • To assist in understanding and interpreting the standards
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2
Q

What two things must an entity’s financial statements comply with?

A
  • IFRS standards
  • Conceptual framework for financial reporting
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2
Q

True or False: Conceptual Framework exactly matches IFRS standards

A

False- there are slight discrepencies but the conceptual framework cannot override any standard requirements

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3
Q

What is the Objective of financial reporting?

A

To provide financial information to lendors, investors and creditors - economic resources of entity and how efficiently and effectively

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4
Q

What is meant by Accrual Accounting?

A

Reporting of Entity’s economic resources and claims are recognised in the period which they occur even if cash is recieved at a later date

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5
Q

What are the fundamental qualitative characteristics of useful financial information?

A

Relevance and Faithfuol representation

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6
Q

What is meant by materiality?

A

Information which if ommitted or misstated could influence decisions - can be material due to size, nature so it is entity specific and judgement based

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7
Q

Explain the fundamental value of Relevance as a qualitative charcteristic

A

Financial informaiton is capable of making a difference in decision making. Due to predictive or confirmatory value - material information

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8
Q

Explain the qualitative characteristic of Faithful representation

A

Information should faithfully represent the substance - complete, neutral and free from error

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9
Q

What is meant by Prudence in Conceptual Framework

A

Exercising of caution when making judegmetns under uncertaintiy- income only stated when realised, liabilities stated when foreseen

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10
Q

What are the four enhancing characteristics of useful financial information?

A
  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
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11
Q

What is the difference between comparability and consistency

A
  • Comparable - entities which are similar can be compared
    -Consistency - use of same methods for same items
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12
Q

Explain enhancing characteristic of verifiability

A

independent observers could reach consensus that information is a faithful representation: can be direct(verify ammount) or indirect (checking inputs to formula)

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13
Q

Explain enhancing characteristic of timliness

A
  • When infromation is available for users
  • Newest informaiton is most useful
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14
Q

Explain enhancing characteristic of Understandability

A
  • Classifying, presenting information clearly to understand
  • Without excluding complex information
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15
Q

What is meant by the cost constraint of useful financial reporting

A

Conceptual framework asks to consider whether the benefits of reporting particular financial information justify the costs incurred to provide it

16
Q

What is meant by going concern?

A

Underlying assumption whereby financial statements are normally prepared assuming entity is going operation in the forseeable future.

17
Q

What does the three elements of Asset, Liability and Equity relate to on financial statement

A

An Entity’s financial position

18
Q

What does the elements of Income and expense relate to on financial statement

A

An Entity’s performance

19
Q

Define asset

A

Present economics resource - right has the potential to produce economic benefits- controlled by entity as a result of of past events

20
Q

What is the accounting formula on the SOFP

A

Assets= Liabilities + Equity

21
Q

What are the three conditions to recognise an asset

A
  • Control: entity must be able to direct use of economic resource
  • Potential to produce economic benefit: resource : cash inflow, reduction of liabilities
  • Right: entity has rights to recieve rg. cash, good/service or PPE
22
Q

Define Liability as per Conceptual framework

A

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

23
Q

What are the three criteria to recognise liability

A
  • Obligation: (legal or contractual), cannot be avoided
  • Transfer of economic resource: Cash payment, delivery of good or service
  • Present obligation due to past events: entity has already obtained economic benefits in the past,
24
Q

Define Equity

A

Residual interest in the assets of an entity after deducting liabilities

Equity = Assets- Liabilities

25
Q

Define Income

A

Increase in assets or decrease in liabilities
- result in increase in equity (other than relating to contributions from holders of equity claims)

26
Q

Define Expenses

A

Decreases in assets or increase in liability
- that result in decrease in equity (other than those relating to distributions to holders of quity claims)

27
Q

What is recognition criteria?

A

An iten is recognised and included in SOFP or SPL when
- it meets the definition of the elements
- AND is Relevant AND Faithful representation
- At a cost which does not outweigh benefits of providing information

28
Q

What is meant by derecognition

A
  • Removal of all or part of recognised asset or liability
  • when control of part or all of an asset is lost
  • No longer a present obligation in respect of liability
29
Q

What is meant by measurement basis?

A

How element is quantified in monetary terms
- Historical Cost : cost inccured in acquiring asset + transactional costs
- Current Value: not from transactional price but price on the measurement date

30
Q

What are the three types of current value

A
  1. Fair Value: market price of asset or liability or estimated using futture cash flows and discounting to reflect time value
  2. Value in use or fulfillment value: present value of cash flow
  3. Current cost: cost of an equibalent asset at measurement date
31
Q

What are the two concepts relating to capital

A

Financial concept of capital: Net Assets or Equity of an entity

Physical Concept of Capital: Productive Capacity of entity eg. output per day

32
Q

What is the concept of financial capital maintenance?

A

Finacial capital maintenace: Profit earned if financial amout of net asssets at end of period > beginning - excluding ditrubutions to and contributions from holders of Equity

33
Q

What is the concept of physical capital maintenance?

A

A profit is made if physical productive capacity or operating cabability of entity at end of period is > begining - exluding any distributions to/contributions from holders of equity

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