Chapter 1 The Conceptual Framework

Question 1

Purpose of financial reporting

Answer 1

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 2

Qualitative characteristics

Answer 2

Fundamental qualitative characteristics:
1. Relevance
Capable of making a difference in the decisions made by users
i.e. Predictive value or confirmatory value.

2. Faithful representation
   Financial information must faithfully represent the phenomena it purports to represent.
   A perfect faithful representation would be:
   - Complete
   - Neutral
   - Free from error
   - Substance over legal form

Enhancing qualitative characteristics:
1. Comparability
Information is more useful if it can be compared with similar information about other entities and other periods.
Consistency helps achieve comparability.

2. Verifiability
   Assures users information faithfully represents the economic phenomena it purports to represent.
   Can be direct or indirect.
3. Timeliness
   Having information available to decision makers in time to be capable of influencing their decisions.
4. Understandability
   Classifying characterising and presenting information clearly and concisely.

Question 3

Going concern

Answer 3

The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future.

Question 4

Elements of financial statements

Answer 4

Asset
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.

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 an entity after deducting all its liabilities

Equity = Net assets = Share capital + Reserves

Income
Increases in economic benefits during the accounting period in the form of inflows or enhancement 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 increases of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Question 5

Recognition of the elements of financial statements

Answer 5

An item is recognised in the statement of financial position or the statement of profit or loss and other comprehensive income when:

1. It meets the definition of an element of the financial statements.
2. It is probable that any future economic benefit associated with the item will flow to or from the entity.
3. The item has a cost or value that can be measured with reliability.