Chapter 2

Question 1

conceptual framework

Answer 1

coherent system of interrelated objectives and fundamentals

Question 2

the conceptual framework can lead to

Answer 2

consistent standards and prescribe the nature, function and limits of financial accounting statements

Question 3

Benefits of conceptual framework

Answer 3

1. Standard setters (IASB, AcSB, FASB) can issue more useful and consistent standards in the future
2. problems should be served more consistently and rapidly with reference to the framework for theory
3. understanding and confidence in financial reports increased
4. comparability between financial statements will increase

Question 4

Framework is used by

Answer 4

1. standard setters to divide new standards

2. people in the industry when applying professional judgement

Question 5

Pillars of conceptual framework

Answer 5

1. Objectives (take into account reporting environment, regulations)
2. Qualitative Characteristics (Primary and enhancing)
3. Elements of financial statements
4. Foundational principles

Question 6

IFRS and ASPE have different frameworks because

Answer 6

IFRS: more regulations, users
ASPE: smaller companies, framework towards owners and lenders

Question 7

Objectives

Answer 7

influenced by a number of factors: reporting and regulatory environment, competition, stakeholder requirements

Question 8

Qualitative Characteristics

Answer 8

Overriding criterion is that it is useful, must be understandable

Question 9

Primary qualities

Answer 9

Relevance and Representational Faithfulness (reliability)

Question 10

Relevance

Answer 10

Capable of making a difference in a decision.

Question 11

Relevant if it has:

Answer 11

1. predictive value

2. Feedback value (confirmatory value)

Question 12

Representational faithfulness

Answer 12

information is transparent, reflects economic reality go event or transaction: shows what its supposed to show, no more no less

Question 13

Representational if it is

Answer 13

1. complete
2. neutral: can be independently verified, free from material error or bias (if someone came in to verify would get the same amount)

Question 14

Enhancing qualities

Answer 14

1. Comparability (sometimes sacrificed for consistency)
2. Verifiability
3. Timeliness (necessary for relevance)
4. Understandability (anyone with reasonable understanding would comprehend the statements)

Question 15

Asset

Answer 15

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

Question 16

Liability

Answer 16

A liability is a present obligation of entity arising from past events, the settlement of which will result in outflow of resources embodying economic benefit

Question 17

Equity

Answer 17

residual interest in assets after deducting liabilities

Question 18

Elements of statements relating to performance

Answer 18

1. revenues, sales
2. expenses
3. gains and losses

Question 19

Revenues/sales

Answer 19

income increased in economic benefit in form of inflows/enhancements of assets or decrease in liabilities
–> increase in equity excluding investment from equity

Question 20

Expenses

Answer 20

decreases in economic benefits in form of outflows or depletion of assets or incurrence of liability –> decrease in equity excluding dividends

Question 21

Gains and losses

Answer 21

revenues and expenses that result from peripheral activities (outside of main line of business)

Question 22

Recognition of the elements of financial statements

Answer 22

process of incorporating in B/S or I/S an item that meets the definition of an element and satisfies criteria for recognition

Question 23

criteria for recognition

Answer 23

1. it is probable that any future economic benefit associated with item will flow to or from the entity
2. item’s cost or value can be measured with reliability

Question 24

An asset is recognized on the B/S when

Answer 24

probable that the future economic benefit, controlled by the entity, arising from past transactions

Question 25

Definition of asset is changing

Answer 25

- asset must be a present economic resource | - company must have a right to access to this resource where others don't

Question 26

Impairment of assets

Answer 26

assets should be tested for impairment (loss in value) regularly. If the value is less than in the books --> must be written down

Question 27

A liability is recognized on B/S when

Answer 27

probable that outflow of resources embody economic benefit will result from the settlement of a present obligation and amount measured reliably : an unavoidable duty arising from past transaction

Question 28

Definition of liability is changing

Answer 28

- present obligation | - obligation is enforceable (legally or constructively)

Question 29

Income is recognized on I/S when

Answer 29

increase in future economic benefit related to an increase in an asset or decrease of liability can be measured reliably (simultaneous with recognition of increase in asset or decrease in liabilities)

Question 30

Expenses are recognized on I/S when

Answer 30

decrease in future economic benefit relating to a decrease in asset or increase in liabilities and measured reliably. (simultaneous with recognition of decrease in asset or increase in liabilities)

Question 31

obligations may be

Answer 31

financial or non-financial

Question 32

i.e. financial obligations

Answer 32

accounts payable

Question 33

i.e. non-financial obligations

Answer 33

conditional pending lawsuit; result of performance obligations

Question 34

Conditional obligations

Answer 34

may or may not become liabilities

Question 35

Under IFRS, another obligations is added

Answer 35

constructive obligations

Question 36

Constructive obligations

Answer 36

not legally enforceable, seen as a moral obligation, when past practice has created expectation from customer that certain obligations will be honoured (warranty)

Question 37

Comprehensive Income and Accumulated other comprehensive income IFRS

Answer 37

Income statement + OCI

Question 38

OCI

Answer 38

unrealized gains and losses on certain items that bypass the income statement on available for sale securities, when sold they get reclassified as income

Question 39

Net income from I/S goes to

Answer 39

retained earnings on B/S on IFRS and ASPE

Question 40

OCI elements go to

Answer 40

AOCI section of shareholder equity on B/S

Question 41

Foundational principles

Answer 41

1. Economic entity 2. Control 3. Revenue recognition 4. matching 5. Periodicity 6. Monetary unit 7. Going concern 8. Historical cost 9. Fair value 10. Full disclosure principle

Question 42

Control

Answer 42

assets not controlled by entity not recognized since company may not have access to the benefits

Question 43

Revenue recognition

Answer 43

generally recognized when 1) risks and rewards were passed on or earnings process is complete, 2) measurement is reasonably certain and 3) collectability is reasonably assured

Question 44

Matching

Answer 44

efforts (expenses) should be matched with the revenues

Question 45

Practical rules for expense matching

Answer 45

1. when direct association, costs expenses against related revenues 2. When association exists but difficult to determine, rational and systematic allocation 3. when little or any association --> expense 4. when a cost does not meet definition of asset --> expense

Question 46

Periodicity

Answer 46

activities of an enterprise can be divided into artificial time periods

Question 47

Monetary unit

Answer 47

money is common denominator = appropriate accounting measurement

Question 48

Going concern

Answer 48

assumption that business will continue in operations for foreseeable future and use assets and pay off liabilities in a normal manner

Question 49

If a company has going concern issues

Answer 49

bring assets to their fair values at the balance sheet date

Question 50

Accruals and deferrals are justified on basis of

Answer 50

the going concern approach

Question 51

Historical cost

Answer 51

recognized at amount paid when received (verifiable)

Question 52

Fair value

Answer 52

today's adjusted value.. slowly more prevalent now when it is more relevant

Question 53

Full disclosure

Answer 53

revealing everything in financial statements, if sufficient importance to influence the judgement and decision of informed reader --> use of notes and supplementary information

Question 54

Some tradeoffs when applying the conceptual framework

Answer 54

1. reliability and relevance (historical value) 2. relevance for conservatism (value lower than fair value) 3. timeliness for verifiability: accruals are not verifiable but made on time 4. comparability for consistency

Question 55

Auditor focus on

Answer 55

verifiability

Question 56

balance between benefit and cost

Answer 56

benefits derived from information should exceed cost of providing it

Question 57

balance between qualitative characteristics

Answer 57

aim is to achieve proper balance to meet objective of financial statements

Question 58

Accrual accounting is application of

Answer 58

matching principle

Question 59

Depreciation expense is application of

Answer 59

matching principle and justified by going concern

Question 60

deferrals like prepaid expenses and unearned revenues are justified by

Answer 60

the going concern principle

Question 61

bad debt expense based on

Answer 61

matching principle

Question 62

adjusting entries based on

Answer 62

matching principle

Question 63

closing entries justified on

Answer 63

periodicity concept

Question 64

information must be timely to be relevant but

Answer 64

timeliness does not imply relevant

Question 65

accruals are said to be

Answer 65

matched but not paid/collected

Question 66

prepaid expenses are said to be

Answer 66

paid but not matched to a given period

Question 67

Measurement bases

Answer 67

1. historical cost 2. current cost (to replace it) 3. Net realizable (settlement)value 4. Present value (discounted)