The Conceptual Framework

Question 1

income

Answer 1

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

Question 2

expenses

Answer 2

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 3

Purpose of the Statement of Cash Flows

Answer 3

Links the profit of the company with changes in assets and liabilities, and the effect on the cash of the company

Question 4

Accounting concepts

Answer 4

Business entity

• financial statements record and report on the activities of one particular entity
• do not include personal assets/liabilities

Materiality
-when some items are of such low value that it’s not worth recording them separately in the accounting records

Going concern
-financial statements are prepared on the assumption that the entity will continue in business for the foreseeable future

Accrual accounting
-income and expenses are matched so that they concern the same goods/services and the same time period; the effects of the transactions are recognised when they occur (and not when cash is received or paid)

Question 5

objective of financial reporting

Answer 5

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

Question 6

equity

Answer 6

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

Question 7

liabilities

Answer 7

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 8

profits

Answer 8

Increases in equity not resulting from contributions from equity participants

Question 9

purpose of the Statement of Financial Position

Answer 9

Lists the assets, equity, and liabilities of the company at the end of the accounting period

Question 10

entity

Answer 10

An organisation whose activities and resources are kept separate from those of the owner(s)

Question 11

purpose of the Statement of Profit or Loss and Other Comprehensive Income

Answer 11

Measures the financial performance of the company for a particular time period (the accounting period)

Question 12

2 fundamental qualitative characteristics

Answer 12

remember “be, have, have, c, a”; “which helps users”

Relevance: for the information to be relevant, it must

• be capable of making a difference in the decisions made by users
• have predictive value, which helps users to predict future outcomes
• have confirmatory value, which helps users to confirm previous evaluations

Faithful representation: the information must

• correspond to the effect of transactions/events
• as far as possible be complete (to include all necessary information for a user), neutral (unbiased), and free from error (no error in the description/process)

Question 13

4 enhancing qualitative characteristics

Answer 13

Comparability
-enables users to identify and understand similarities in, and differences among, items for other years and other companies

Verifiability
-helps assures users that information is faithfully represented

Timeliness
-having information available to decision-makers in time to be capable of influencing their decisions

Understandability
-information is classified, characterized and presented clearly and concisely

Question 14

losses

Answer 14

decreases in equity not resulting from distributions to equity participants

Question 15

assets

Answer 15

An asset is a 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

Principal users of financial statements

Answer 16

• existing investors
• to assess whether to continue to hold, to sell, or to buy more shares in the company
• potential investors
• to decide whether to buy shares in the company
• lenders
• to decide whether to offer loans and what rates of interest to charge
• other creditors
• To decide whether to supply goods and services

Question 17

Measurement bases

Answer 17

• Historical cost
• assets are recorded at the amount paid, or the fair value at the time of acquisition
• liabilities are recorded at the amount expected to be paid
• Current cost
• what it would cost to replace assets and liabilities at today’s prices
• Realisable (settlement) value
• what the assets could be sold for, and the amount required to settle the liabilities, today
• Present value
• assets and liabilities are valued at the present discounted value of their future cash inflows and outflows

Question 18

ethics

Answer 18

integrity, objectivity, professional competence and due care, confidentiality, professional behaviour

Question 19

integrity

Answer 19

An accountant must not be associated with reports, returns, communications, or other information that:

• contain false or misleading statements
• contain statements/information furnished recklessly
• omits or obscures information so as to be misleading

Be straightforward and honest in performing professional work and in all business relationships

Question 20

objectivity

Answer 20

An accountant must avoid situations and relationships that result in bias, conflict of interest, as the undue influence of others, as these could override professional/business judgements

Question 21

confidentiality

Answer 21

• The accountant must not disclose information to third parties without proper specific authority.
• Only under certain circumstances permitted/required by the law (e.g. a money laundering case), or as a result of a professional duty/right to disclose in the public’s interest can the accountant disclose such information.
• This extends to social gatherings, family, friends, competitors, and even within the workplace

Question 22

professional competence and due care

Answer 22

The accountant is required to be aware of and have an understanding of technical, professional and business developments.

The accountant is also required to act in accordance with the requirements of the work assignments in a careful, thorough and timely manner

Question 23

professional behavior

Answer 23

The accountant must be honest and truthful in all dealings so as not to bring the profession into disrepute

-do not exaggerate claims your accounting qualifications, services offered, gained experiences