Domain IV − Financial Management − Section A: Financial Accounting and Finance

Question 1

Relevance (accounting information)

Answer 1

must be capable of making a difference in a decision.

Question 2

Verifiability (accounting information)

Answer 2

i.e., the same results would be achieved by independent measurers, using the same measurement methods.

Question 3

Representational faithfulness (accounting information)

Answer 3

the numbers and descriptions represent what really existed or happened (i.e., substance of transactions rather than their form)

Question 4

Neutrality (accounting information)

Answer 4

information is not biased and cannot be selected to favor one set of interested parties over another.

Question 5

Comparability (accounting information)

Answer 5

information about an enterprise is more useful if it can be compared with similar information about another enterprise and with similar information about the same enterprise at other points in time.

Question 6

Consistency (accounting information)

Answer 6

is when an entity applies the same accounting treatment to similar events and from period to period.

Question 7

Assets

Answer 7

are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Question 8

Liabilities

Answer 8

are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Question 9

Equity

Answer 9

is the residual interest in the assets of an entity that remains after deducting its liabilities.
=> In a business enterprise, the equity is the ownership interest.

Question 10

Investments by owners

Answer 10

are increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests in it.

Question 11

Distributions to owners

Answer 11

are decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to its owners.
=> Distributions to owners decrease ownership interests in an enterprise.

Question 12

Comprehensive income

Answer 12

change in equity of an entity during a period from transactions and other events and circumstances from non‐owner sources.

Question 13

Revenues

Answer 13

are inflows or other enhancements of assets of an entity or settlement of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Question 14

Expenses

Answer 14

are outflows or other using up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.

Question 15

Gains

Answer 15

are increases in equity from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

Question 16

Losses

Answer 16

are decreases in equity from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

Question 17

Measurement Concepts

Answer 17

• Historical cost – how much was actually surrendered in the past to acquire the item.
• Fair market value – how much is the current value in the market.
• Current cost – how much would it cost the company today to acquire the same item.
• Present value of future cash flows – the net discounted cash flows that will be collected from an asset or the discounted cash flows that will be incurred to repay a liability.
• Net realizable value – the total value that could be realized if the underlying asset is liquidated. It may include the sale proceeds less any costs to dispose.

Question 18

Basic Assumptions

Answer 18

• Economic Entity Assumption – economic activity can be identified with a particular unit of accountability.
• Going Concern Assumption – that the business enterprise will have a long life. The going concern assumption applies in most business situations except where liquidation appears imminent.
• Monetary Unit Assumption – money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
  Periodicity Assumption – the economic activities of an enterprise can be divided into artificial time periods.

Question 19

Basic Principles of Accounting

Answer 19

• Historical Cost Principle – most assets and liabilities be accounted for and reported on the basis of acquisition price. If liquidation is imminent, assets and liabilities should be reported at their net realizable value.
• Revenue Recognition Principle – an entity recognizes revenue when the transfer of promised goods or services to customers in an amount that reflects exchange for those goods or services. (e.g. recording advanced payments from customers as liabilities (Unearned Revenues))
• Matching Principle – efforts (expenses) must be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so. (e.g. recording insurance expense paid in advance as an asset (Prepayments))
• Full Disclosure Principle – accountants follow the general practice of providing information that is of sufficient importance to influence the judgment and decisions of an informed user.