Module 2

Question 1

Definition of Accounting

Answer 1

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions – in making reasoned choices among alternative courses of action

Question 2

Objective of Financial Reporting

Answer 2

provide information useful for decision making

Question 3

Two Major Classifications of Stakeholders

Answer 3

Internal Users- Make decisions directly affecting the internal operations the enterprise.
External Users- Make decisions concerning their relationship to the enterprise.

Question 4

What is the purpose of the Conceptual Framework?

Answer 4

establishes the concepts that underlie financial reporting

Question 5

Why is there a need for the conceptual framework?

Answer 5

*Rule -making should build on and relate to an established body of concepts.
* Enables IASB to issue more useful and consistent pronouncements over time particularly as Board members change
* Provides benchmark for judgments
* IASB uses the Conceptual Framework to set standards
* Preparers use the Conceptual Framework to develop accounting policies in the absence of specific standard or interpretation

Question 6

What are the 3 Levels of the Conceptual Framework?

Answer 6

1- Basic Objective
2- Fundamental Concepts: Qualitative Characteristics, Elements
3- Recognition, Measurement, and Disclosure Concepts: Assumptions, Principles, Constraints

Question 7

What is the Basic Objective?

Answer 7

provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers

Question 8

Why did the IASB develop qualitative characteristics?

Answer 8

distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.

Question 9

Name and describe the 2 fundamental characteristics.

Answer 9

relevance and faithful representation

Question 10

Name and describe the 3 ingredients of relevance.

Answer 10

■Predictive Value - Information is relevant if it helps users of the financial statements in predicting future trends of the business
■Confirmatory Value - Information can confirm or correct any past predictions that have been made
■Predictive & Confirmatory Value - Information is relevant because it combines historical and future predicted information to assist in the decision-making process.

Question 11

What are the 3 ingredients of faithful representation?

Answer 11

1- Complete
2- Neutral
3- Free from error

Question 12

What are the enhancing characteristics of relevance?

Answer 12

1- comparability
2- verifiability
3- understandability
4- timeliness

Question 13

What are the enhancing characteristics of faithful representation?

Answer 13

1- Timeliness
2- Understandability
3- verifiability
4- comparability

Question 14

Name and describe the 5 Elements.

Answer 14

Asset. A present economic resource controlled by the entity as a result of past events. An economic resource has the potential to produce economic benefits.
Liability. A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Equity. The residual interest in the assets of the entity after deducting all its liabilities.
Income. Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
Expenses. Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

Question 15

Name and describe the 5 assumptions.

Answer 15

Economic Entity: An entity keeps its activity separate from its owners and other business unit(s)
Going concern: Entity will be able, in the future, to fulfill its objectives and commitments
Monetary unit: Money is the common denominator
Periodicity: The entity is able to separate its activities into time periods
Accrual Basis of Accounting: Transactions are recorded in the periods in which the events occur

Question 16

Name and describe the 4 Principles.

Answer 16

Measurement* Cost is generally thought to be a faithful representation of the amount paid for a given item.* Fair value is “the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.”* IASB has taken the step of giving companies the option to use fair value as the basis for measurement of financial assets and financial liabilities.

Revenue Recognition: Revenue is to be recognized when it is probable that future economic benefits will flow to the company and reliable measurement of the amount of revenue is possible.

Expense Recognition: Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than to equity participants. Some expenses are matched to cost. Some are periodic expenses and are not matched to costs.

Full Disclosure: Full disclosure is providing information that is of sufficient importance to influence the judgment and decisions of an informed user.

Question 17

Name and describe the 2 Constraints.

Answer 17

• Cost* The cost of providing the information must be weighed against the benefits that can be derived from using it.
• Materiality* Information is considered to be material if its omission, or misstatement, could influence the financial decisions made by users taken on the basis that financial statements provided are complete and comprehensive.