International accounting standard 1

Question 1

What are the two main advantages of standardisation due to international accounting standards?

Answer 1

Faithful representation - ensures that financial reporting is free from bias.

Comparability - ensures that financial statements are drawn up on a consistent basis so they can be compared to previous years or other entities.

Question 2

What is meant by materiality?

Answer 2

The relevance of information depends on its level of materiality.

Material information has a large effect on the financial statements, its omission or mis-statement could influence users’ decisions.

The IASB cannot specify a generally applicable materiality threshold, since materiality is an entity-specific matter.

Question 3

What are the two fundamental qualitative characteristics of the conceptual framework?

Answer 3

Relevance - predictive value, confirmatory value

Faithful representation - completeness, neutrality, freedom from error

Question 4

What are the four enhancing qualitative characteristics of the conceptual framework?

Answer 4

Comparability - consistency of the use of accounting treatments in order to compare data between businesses or over time
Verifiability - direct verification (measuring i.e. counting cash), indirect verification (recalculating values in the financial statements)
Timeliness - made in time to influence user’s economic decisions
Understandability - improved when information is classified and presented clearly and concisely

Question 5

Define “income”

Answer 5

Income is the increase in net assets

Examples:
Revenue
Gains arising on the disposal of a non-current asset
Gains arising on the revaluation of a long-term asset

Question 6

Define “equity”

Answer 6

The residual interest in the assets of an entity after deducting all it’s liabilities

Equity = Assets - Liabilities

Equity usually consists of share capital, retained earnings and other reserves

Question 7

Define “liability”

Answer 7

A PRESENT OBLIGATION of the entity arising from PAST EVENTS, the settlement of the liability is expected to result in an OUTFLOW FROM THE ENTITY’s resources of economic benefits

Question 8

Define “asset”

Answer 8

A resource controlled by an entity as a result from PAST EVENTS and from which future economic benefits are expected to FLOW TO THE ENTITY