Introduction to Accounting Flashcards
Which of the following best explains the term ‘capital expenditure’:
A) on non-current assets, including repairs and maintenance
B) on expensive items over £10,000
C) on the acquisition of non-current assets, or improvement in the earning capacity
D) on items relating to owners capital
C) on the acquisition of non-current assets, or improvement in the earning capacity
Capital expenditure relates to the acquisition of, or improvement of the earning capacity of non current assets
Which of the following should be accounted for as capital expenditure?
A) The annual cost of painting a factory floor
B) The repair of a window in a building
C) The purchase of a vehicle for re-sale by a car retailer
D) Legal fees incurred on the purchase of a building
D) Legal fees incurred on the purchase of a building
Professional fees incurred on the acquisition of a non current asset are capitalised as part of the cost of that asset. The other costs are revenue expenditure and are therefore written off as expenses in the year.
Which of the following transactions should be treated as capital expenditure in the financial statements of Sydney, a sole trader?
A) £500 taken by Sydney to buy a music system for personal use
B) £800 spent on purchasing a new laptop to replace the secretary’s old one
C) £2,000 on purchasing a machine for re-sale
D) £150 paid to a painter for redecorating his office
B) £800 spent on purchasing a new laptop to replace the secretary’s old one
Item A is drawings, C is the acquisition of a current asset in the form of inventory, and D is a revenue expense.
Which of the following is an aspect of relevance according to the IFRS Foundation’s Conceptual Framework for Financial Reporting (the Conceptual Framework for Financial Reporting)?
A) Neutrality
B) Free from error
C) Completeness
D) Materiality
D) Materiality
Information is affected by its materiality. A, B&C are all characteristics contributing to information being a faithful representation of what it claims to represent.
According to the Conceptual Framework for Financial Reporting, which of the following are enhancing qualitative characteristics?
A) Comparability, understandability, timeliness, verifiability
B) Consistency, prudence, measurability, verifiability
C) Consistency, reliability, measurability, timeliness
D) Materiality, understandability, measurability, reliability
A) Comparability, understandability, timeliness, verifiability
This is set out in para 2.23-2.36 of the Conceptual Framework for Financial Reporting.
In relation to the business of a sole trader, which two of the following does the government and its agencies need to be able to do?
A) Establish levels of tax revenue
B) Assess whether the business will continue in existence
C) Produce National Statistics
D) Assess the owners stewardship
E) Take decisions about their investment,
A) Establish levels of tax revenue + C) Produce National Statistics
The government and its agencies require information relating to both tax and national statistics. Whether the business will continue as a going concern (B) is an issue for the sole trader, its suppliers, customers and employees. Probably only the sole trader is interested in their own stewardship (D) of the business’s resources; this is really only an issue for company owners, as is (E).
Information about an entity’s assets and liabilities at a point in time is primarily provided in:
A) the statement of profit or loss
B) the statement of financial position
C) retained earnings
D) the statement of cash flows
B) the statement of financial position
The financial position of an entity is reflected in the resources it controls (assets), financial structure (debt and capital), liquidity (ash) and solvency (ability to pay its debts). Most of this information is provided in the statement of financial position (B).
The statement of profit or loss primarily provides information about an entity’s financial performance, while the statement of cash flows reflects changes in the cash position in the period. Retained earnings is a figure in the statement of financial position which accumulates retained profits less any retained losses over the entity’s life.
According to the conceptual framework for financial reporting, information on which two of the following areas can help users identify the reporting entities financial strengths and weaknesses?
A) the economic resource is it controls
B) its financial performance in the past
C) the demographic structure of the local economy
D) the claims on an entity’s resource (the entity’s liabilities)
E) Its management structure
A) the economic resource is it controls + D) the claims on an entity’s resource (the entity’s liabilities)
The Conceptual Framework for Financial Reporting states that information about the economic resources (A) and claims (D) of an entity can help users to identify the reporting entity’s financial strengths and weaknesses. That information can then be used to help users to assess the reporting entity’s liquidity and solvency.
According to IAS 1, Presentation of Financial Statements, which two of the following are objectives of primary financial statements?
A) To show the results of management’s stewardship of the resources entrusted to it
B) To provide a basis for valuing the entity
C) To provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions
D) To facilitate comparison of financial performance between entities operating in different industries
E) To assist management and those charged with governance in making timely economic decisions about deployment of the entity’s resources
A) To show the results of management’s stewardship of the resources entrusted to it + C) To provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions
IAS 1, Presentation of Financial Statements provides the objective of financial statements. It states that the objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions (C). In addition, it states that the financial statements also show the results of management’s stewardship of the resources entrusted to it (A).
Information is relevant if it is capable of making a difference in the decisions made by users. According to the Conceptual Framework for Financial Reporting, financial information is capable of making a difference in decisions if it has which of the following:
A) Predictive value and historic value only
B) Comparative value and confirmatory value only
C) Predictive value and confirmatory value only
D) Comparative value and historic value only
C) Predictive value and confirmatory value only
Financial information can make a difference to decisions if it has predictive value (it can be used to predict future outcomes), confirmatory value (it provides feedback about previous evaluations) or both.
The accounting principle which, in times of rising prices, tends to understate asset values and overstate profits is:
A) going concern
B) accruals
C) consistency
D) historical cost
D) historical cost
The historical cost convention will understand asset values as the cost of assets is determined at the date of purchase. This in turn results in higher profits because depreciation is lower.
Which of the following statements about accounting concepts and characteristics of financial information is correct?
A) Financial statements are required to give a true and fair view. These terms have clear definitions which are included in IAS 1, Presentation of Financial Statements.
B) The historical cost concept means that only items capable of being measured in monetary terms can be recognised in financial statements.
C) It may sometimes be necessary to exclude information that is relevant and reliable from financial statements because it is too difficult for some users to understand.
D) A specific disclosure requirement of an IFTS Accounting Standard need not be satisfied if the information is immaterial.
D) A specific disclosure requirement of an IFTS Accounting Standard need not be satisfied if the information is immaterial.
Disclosures are not required if the information they provide is immaterial. While financial statements are required to give a true and fair view, these terms are not defined in statute, they tend to be determined in courts of law or on facts (A). Recognition of items on the basis of monetary amounts is the money measurement concept, not the historical cost concept (B). Items should not be excluded on the basis of being difficult to understand (C).
Listed below are two comments on accounting conventions:
1) According to the Conceptual Framework for Financial Reporting, financial information must be either relevant or faithfully represented if it is to be useful.
2) Materiality means that only items having a physical existence may be recognised as assets.
Which, if either, of these comments is correct?
A) 1 only
B) 2 only
C) Both of them
D) Neither of them
D) Neither of them
- Info must be both relevant and faithfully represented to be useful.
- Materiality concerns whether an item in the financial statements can influence users’ decisions; there is no absolute amount or specific characteristic that makes an item material.
Which of the following is the best description of fair presentation in accordance with IAS 1, Presentation of Financial Statements?
A) The financial statements are accurate
B) The financial statements are as accurate as possible given the accounting systems of the organisation
C) The directors of the company have stated that the financial statements are accurate and correctly prepared.
D) The financial statements are reliable in that they faithfully reflect the effects of transactions, other events and conditions.
D) The financial statements are reliable in that they faithfully reflect the effects of transactions, other events and conditions.
This statement is consistent with the definition given in IAS 1, para 15.
Which of the following definitions of the going concern concept in accounting is consistent with the definition given in IAS 1, Presentation of Financial Statements?
A) the directors do not intend to liquidate the entity or to cease trading in the foreseeable future.
B) the entity is able to pay its debts as and when they fall due.
C) The directors expect the entity’s assets to yield future economic benefits.
D) financial statements have been prepared on the assumption that the entity is solvent and would be able to pay all creditors in full in the event of being wound up.
A) the directors do not intend to liquidate the entity or to cease trading in the foreseeable future.
According to IAS 1, para 25, going concern relates to whether the entity will continue in operation existence without liquidating, ceasing trading or being unable to avoid these things (A).
