Question 1

Bowen Pty Ltd is a small proprietary company with seven directors.Four of the seven directors own 75% of the ordinary shares and the remaining shares are owned by family members of the directors.The company also has 15 trade creditors and an open line of credit with one state bank.Is Bowen Pty Ltd a reporting entity and hence required to prepare general purpose financial reports?
A) Yes, because dependent users of financial reports exist.
B) Yes, because there are trade creditors who are external users.
C) No, because it is a small proprietary firm.
D) No, because there are no obvious users who are unable to command the preparation of information from the entity.

Accepted Answer

Bowen Pty Ltd is not considered a reporting entity as it is a small proprietary company primarily owned and managed by a close group of individuals (directors and their family members), indicating that there are no external users who cannot command the preparation of reports tailored to their needs.

Question 2

A central goal in establishing a conceptual framework of accounting will be to obtain general consensus on:
A) the scope and objectives of financial reporting.
B) the qualitative characteristics that financial information should possess.
C) what the elements of financial reporting are, including agreement on the characteristics and recognition criteria for assets, liabilities, income, expenses and equity.
D) the scope and objectives of financial reporting and the qualitative characteristics that financial information should possess.

Accepted Answer

The question mentions two important aspects: establishing a conceptual framework of accounting and obtaining general consensus. The three options listed (A, B, and C) all contribute to the establishment of such a framework, but none of them on their own can achieve general consensus. Therefore, the best option is D, which combines the scope and objectives of financial reporting with the qualitative characteristics that financial information should possess. This broader approach is more likely to garner greater agreement among stakeholders and establish a more robust conceptual framework.

Question 3

When a standard restricts the number of accounting methods to be used to account for a particular accounting issue,it is promoting the qualitative characteristic of ______________?
A) timeliness
B) prudence
C) understandability
D) comparability

Accepted Answer

The qualitative characteristic being promoted here is comparability. By restricting the number of accounting methods, the standard is making sure that the accounting treatment for a particular issue is consistent across different entities, which enhances comparability.

Question 4

James Cook Ltd bought a piece of land 10 years ago and the market value of this property is now worth five times its purchase cost.The accountant suggested that James Cook Ltd should revalue the asset.This notion is consistent with the qualitative characteristic of:
A) relevance.
B) faithful representation.
C) understandability.
D) comparability.

Accepted Answer

Revaluing the asset is relevant information as it provides updated information on the current value of the asset for decision-making purposes. Relevance is one of the qualitative characteristics of financial reporting which states that financial information should be capable of influencing decisions by users.

Question 5

The Framework identifies two aspects to financial information that are 'relevant'.These are:
A) verifiability and understandability.
B) predictability and verifiability.
C) neutrality and verifiability.
D) prudence and neutrality.

Accepted Answer

The answer of The Framework identifies two aspects to financial...

Question 6

The IASB Conceptual Framework for Financial Reporting (as released in 2010),requires that general purpose financial reports disclose information that is:
A) relevant to the assessment of profit, funding and investing, and compliance.
B) relevant to the assessment of financial and social performance, financial position and funding and investing, and includes information about compliance.
C) relevant to the assessment of performance, financial position and funding and investing, including information about compliance.
D) relevant to the assessment of performance, financial position and cash flows.

Accepted Answer

The IASB Conceptual Framework for Financial Reporting emphasizes the importance of disclosing information that is relevant to the assessment of an entity's performance, financial position, and cash flows. This focus is designed to ensure that users of financial reports have the necessary information to make informed decisions regarding the entity.

Question 7

Which of the following statement(s)is/are true of general purpose financial reports?
A) General purpose financial reports should be prepared by all reporting entities.
B) General purpose financial reports are reports that comply with statements of accounting concepts and accounting standards.
C) General purpose financial reports are intended to meet the information needs common to users who are able to command the preparation of reports.
D) General purpose financial reports should be prepared by all reporting entities and general purpose financial reports are reports that comply with statements of accounting concepts and accounting standards.

Accepted Answer

Both statements A and B are true about general purpose financial reports, while statement C is partially true as the reports are intended to meet the information needs common to a wide range of users, not just those who are able to command the preparation of reports. Therefore, statement D is the best choice as it accurately reflects the true statements about general purpose financial reports.

Question 8

Mr and Mrs K Urban are partners in Urban Ltd,a music shop with sales revenue of $5 000 000 per annum,total assets of $10 000 000 and employees totalling 15.Urban Ltd is:
A) a reporting entity because there are at least two users of a financial report.
B) not likely to be a reporting entity because it is unlikely to have users dependent on its financial reports.
C) likely to be a reporting entity because there are two shareholders and it is an exempt proprietary entity.
D) not a reporting entity because small proprietary companies are frequently not considered reporting entities.

Accepted Answer

The answer of Mr and Mrs K Urban are partners...

Question 9

Which of the following statement(s)is/are true of the qualitative characteristic 'faithful representation'?
A) information that is free from material bias and error
B) information that faithfully represents what it purports to represent
C) information that should affect the decisions of financial statement users
D) information that is free from material bias and error, complete description and that faithfully represents what it purports to represent

Accepted Answer

Faithful representation requires information that is both free from material bias and error, and provides a complete description that faithfully represents what it purports to represent. This information should also be relevant and capable of influencing the decisions of financial statement users. Option A is incomplete as it only refers to one aspect of faithful representation, while option B and C describe relevant characteristics of financial information, but not specifically related to faithful representation.

Question 10

Which of the following are considered in the AASB Framework as primary qualitative characteristics?
A) relevance, faithful representation, materiality and comparability
B) relevance, faithful representation, timeliness and understandability
C) relevance, faithful representation, understandability and comparability
D) materiality, faithful representation, understandability and comparability

Accepted Answer

According to the AASB Framework, the primary qualitative characteristics are relevance, faithful representation, understandability, and comparability. Timeliness is considered a secondary qualitative characteristic. Materiality is important but not classified as a qualitative characteristic. Therefore, option C is the correct answer.

Question 11

Which of the following factors should be considered in order to determine whether an entity is a reporting entity when it is not obvious that users exist who would be dependent on the financial reports of the entity?
A) separation of management from those with economic interest in the entity
B) economic or political importance/influence
C) financial characteristics
D) separation of management from those with economic interest in the entity and economic or political importance/influence

Accepted Answer

The determination of a reporting entity considers both the separation of management from those with economic interest and the entity's economic or political importance/influence, as these factors indicate the potential need for external users to rely on financial reports.

Question 12

Which of the following statement(s)is/are true of the qualitative characteristic 'comparability'?
A) A financial report must show corresponding results for the preceding period.
B) A financial report must be presented in a consistent manner, hence, an entity must adopt similar accounting policies from period to period even though a more reliable and relevant alternative exist.
C) A financial report must contain all material and relevant items.
D) A financial report must show corresponding results for the preceding period and be presented in a consistent manner, hence, an entity must adopt similar accounting policies from period to period even though a more reliable and relevant alternative exist.

Accepted Answer

The answer of Which of the following statement(s)is/are true of...

Question 13

The audit of the financial reports of Matilda Ltd had been completed except for the outcome of a material contingent liability that is still subject to the outcome of a court decision.The case is still ongoing but it is expected that a decision will be made after three months.The deadline for submitting the financial reports is next month.Which action is consistent with the notion of 'timeliness' in the preparation of financial reports?
A) Matilda Ltd should wait for the court decision to be completed before releasing the financial reports as the amount of the liability is material.
B) Matilda Ltd should release the financial report on or before the deadline but exclude the contingent liability from the report as the outcome is still uncertain.
C) Matilda Ltd should release the financial report on or before the deadline but disclose the contingent liability in the notes to the accounts.
D) Matilda Ltd must wait for the court decision to be completed before releasing the financial reports as it is expected to occur in the near future anyway (i.e. three months).

Accepted Answer

The principle of timeliness suggests that financial reports should be prepared, presented, and made available to users as soon as possible after the reporting period. Matilda Ltd cannot wait for the court decision to be completed before submitting the financial reports, as this would not be timely. Similarly, excluding the contingent liability from the financial report would not be appropriate, as this would result in incomplete and potentially misleading financial reports. The best course of action is to release the financial report on or before the deadline and disclose the contingent liability in the notes to the accounts. This will provide users with relevant and reliable information and will also comply with the principle of timeliness.

Question 14

Which of the following actions are consistent with the Doctrine of Conservatism?
A) deliberate overstatement of expenses to reduce profits
B) excessive provisions for warranty expenses
C) careful assessment of doubtful debts
D) adoption of accelerated depreciation method to reduce profits

Accepted Answer

The Doctrine of Conservatism requires a careful assessment of doubtful debts, which is consistent with option C. Overstatement of expenses to reduce profits and adoption of accelerated depreciation method to reduce profits are not consistent with conservatism as they go against the principle of reporting information that is cautious and prudent. Excessive provisions for warranty expenses may or may not be consistent with conservatism depending on their nature and reliability.

Question 15

Which of the following actions best describes the qualitative characteristic 'relevance'?
A) The financial report of KMC Ltd was audited by one of the Big 4 four accounting firms.
B) DGC omitted a sales transaction equal to 10.5% of its accounts receivable.
C) MCB Ltd and DGC Ltd both use accelerated depreciation method.
D) GEP Ltd did not revalue its intangible assets because it was difficult to obtain the fair value of the assets.

Accepted Answer

The action described in option B best describes the qualitative characteristic of relevance, as it pertains to information that can influence a user's economic decisions. Omitting a sales transaction will have an impact on the financial statements and could potentially affect a user's decision-making process. The actions in the other options may be important, but do not necessarily relate to influencing economic decisions.

Question 16

The Framework outlines two underlying assumptions of financial statements.These are:
A) fair value basis and insolvency assumption.
B) accrual basis of accounting and going concern assumption.
C) cash basis of accounting and insolvency assumption.
D) historical cost accounting and limited life concept.

Accepted Answer

The underlying assumptions of financial statements are the accrual basis of accounting and going concern assumption. The accrual basis of accounting recognizes revenue and expenses when they are earned/incurred, regardless of when the cash is actually received/paid. The going concern assumption assumes that the business will continue to operate in the foreseeable future. These assumptions are important for financial statement users to understand when interpreting the financial information presented.

Question 17

When preparing financial reports 'users are assumed to have a reasonable knowledge of the business and economic activities and accounting and a willingness to study the information with reasonable diligence'.This statement is consistent with the qualitative characteristic of:
A) materiality.
B) faithful representation.
C) understandability.
D) comparability.

Accepted Answer

The statement is consistent with the qualitative characteristic of understandability, which is defined as the quality of financial information that makes it comprehensible to users who have a reasonable knowledge of business and economic activities and accounting. Users are expected to be willing to study the information with reasonable diligence. Therefore, financial reports should be presented in a clear and concise manner, using plain language and avoiding technical jargon, to facilitate their understanding.

Question 18

The IASB Conceptual Framework adopts which approach to determining profits?
A) revenue/expense approach
B) matching principle approach
C) asset/liability approach
D) cash basis approach

Accepted Answer

The IASB Conceptual Framework adopts the asset/liability approach to determining profits, which means profits are recognized when there is an increase in assets or a decrease in liabilities that can be attributed to the activities of an entity. This approach focuses on changes in the entity's economic resources rather than revenue and expenses.

Question 19

The accountant of Broken Bay Ltd decided to retain the historical cost of the entity's intangible assets because it was difficult to obtain fair value of these assets.This action is consistent with ____________.
A) substance over form
B) balancing of relevance and faithful representation
C) accrual accounting
D) cash accounting

Accepted Answer

The decision to retain historical cost of intangible assets suggests that the accountant was balancing the relevance (importance) and faithful representation (reliability) of the information. This is a key principle in accounting, as financial statements must provide information that is both relevant and reliable for users to make informed decisions. The difficulty in obtaining fair value suggests that the information may not be entirely reliable if fair value was used, but historical cost is still relevant information for users to understand the entity's financial position. Therefore, the accountant's action is consistent with balancing relevance and faithful representation.

Question 20

Which of the following is/are characteristics of 'comparability'?
A) Users must be able to compare the financial reports of an entity with the financial reports of a shareholder.
B) Users must be able to compare the current financial reports with prior period financial reports of an entity.
C) Users must be able to compare the financial reports of an entity with the financial reports of another entity.
D) Users must be able to compare the current financial reports with prior period financial reports of an entity and users must be able to compare the financial reports of an entity with the financial reports of another entity.

Accepted Answer

Comparability requires that users must be able to compare the current financial reports with prior period financial reports of an entity and users must be able to compare the financial reports of an entity with the financial reports of another entity. Therefore, both B and C are characteristics of comparability, making option D the correct choice. Option A is not a characteristic of comparability as financial reports of a shareholder are not used for comparison purposes.

Quiz 2: The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

A central goal in establishing a conceptual framework of accounting will be to obtain general consensus on:

When a standard restricts the number of accounting methods to be used to account for a particular accounting issue,it is promoting the qualitative characteristic of ______________?

James Cook Ltd bought a piece of land 10 years ago and the market value of this property is now worth five times its purchase cost.The accountant suggested that James Cook Ltd should revalue the asset.This notion is consistent with the qualitative characteristic of:

The Framework identifies two aspects to financial information that are 'relevant'.These are:

The IASB Conceptual Framework for Financial Reporting (as released in 2010) ,requires that general purpose financial reports disclose information that is:

Which of the following statement(s) is/are true of general purpose financial reports?

Mr and Mrs K Urban are partners in Urban Ltd,a music shop with sales revenue of $5 000 000 per annum,total assets of $10 000 000 and employees totalling 15.Urban Ltd is:

Which of the following statement(s) is/are true of the qualitative characteristic 'faithful representation'?

Which of the following are considered in the AASB Framework as primary qualitative characteristics?

Which of the following factors should be considered in order to determine whether an entity is a reporting entity when it is not obvious that users exist who would be dependent on the financial reports of the entity?

Which of the following statement(s) is/are true of the qualitative characteristic 'comparability'?

Which of the following actions are consistent with the Doctrine of Conservatism?

Which of the following actions best describes the qualitative characteristic 'relevance'?

The Framework outlines two underlying assumptions of financial statements.These are:

When preparing financial reports 'users are assumed to have a reasonable knowledge of the business and economic activities and accounting and a willingness to study the information with reasonable diligence'.This statement is consistent with the qualitative characteristic of:

The IASB Conceptual Framework adopts which approach to determining profits?

The accountant of Broken Bay Ltd decided to retain the historical cost of the entity's intangible assets because it was difficult to obtain fair value of these assets.This action is consistent with ____________.

Which of the following is/are characteristics of 'comparability'?