The Conceptual Framework (Chapter 1)

Question 1

What is the Conceptual Framework?

Answer 1

A statement of generally accepted theoretical principles which create a foundation upon which accounting standards are written.

Question 2

Why do we need a Conceptual Framework?

Answer 2

1. To develop new reporting practices.

2. Evaluate existing practices.

Question 3

What are the Advantages of the Conceptual Framework?

Answer 3

1. Standardised accounting practice.
2. Less subject to political pressure.
3. Consistent SOFP & SPL approach.
4. Avoids ‘firefighting’ approach to standard setting.

Question 4

What are the Disadvantages of the Conceptual Framework?

Answer 4

1. Needs of all users cannot be considered.
2. Different users require different concepts.
3. Does not necessarily make preparing standards easier.

Question 5

What is the general purpose of Financial Statements?

Answer 5

To provide financial information useful to users in making economic decisions about the entity.

Question 6

What are the 2 categories of qualitative characteristics for useful financial information?

Answer 6

Fundamental & Enhancing.

Question 7

What are the fundamental characteristics of financial information?

Answer 7

1. Relevance.
2. Faithful Representation.
3. Materiality.

Question 8

What are the enhancing characteristics of financial information?

Answer 8

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 9

What is the going concern assumption?

Answer 9

Going concern is the underlying assumption that the entity intends and is able to continue operating for a time period greater than the next 12 months.

Question 10

What is an Asset?

Answer 10

A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Question 11

What is a Liability?

Answer 11

A liability is 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.

Question 12

What is equity?

Answer 12

The residual interest in the assets of the entity after deducting all of its liabilities.

Equity = Net Assets = Share Capital + Reserves

Question 13

What is the definition of Income?

Answer 13

Increases in economic benefits during the accounting period in the form of:

1. Inflows or increases in assets.
2. Decreases in liabilities that result in increases in equity.

Question 14

What is the definition of an expense?

Answer 14

Decreases in economic benefits during the accounting period in the form of:

1. Outflows or decreases in assets
2. Increases in liabilities which result in decreases in equity.

Question 15

What is the recognition criteria for financial statements?

Answer 15

1. Probable future economic benefit

2. Value or cost can be measured reliably.

Question 16

What are the ways in which cost can be measured in the financial statements?

Answer 16

Historic cost, current cost, realisable value & present value.