Definitions for part 1 & 2

Question 1

Relevance

Answer 1

Relevant financial information is that which is capable of influencing the decisions of users
In determining what is relevant to users preparers of financial statements should consider whether information is material and the extent to which reliable information may be omitted.

Question 2

Materiality
hint x or y

Answer 2

Information may be material and therefore relevant simply because of its
magnitude
or
because its omission from the financial statements could affect decision making

Question 3

Faithful representation

Answer 3

Faithful representation means that financial information must meet three criteria: completeness, neutrality and be free from error

Question 4

Completeness

Answer 4

All information that users need to understand the item is given

Question 5

Neutrality

Answer 5

There is no bias in the selection or presentation of information

Question 6

Free from error

Answer 6

There are no omissions, errors or inaccuracies in the process to produce the information

It is recognised that this is not entirely possible due to human error
Inaccuracies will arise particularly when estimating but it is expected that estimates are made on realistic basis

Question 7

Comparability

Answer 7

Accounting method applied consistently in similar situations, facilitating comparison with information for similar entities

Question 8

Verifiability

Answer 8

Accounting info must be checked and verified to be true, accurate or justified

Question 9

Timeliness

Answer 9

Provision of information must be timely in order to provide substantive value to the user

Question 10

Understandability

Answer 10

Format and layout of FS and terminology used must be clear and concise

Question 11

Asset

Answer 11

Present economic resource controlled by the entity, with the potential to produce economic benefits

Question 12

Liability

Answer 12

A present obligation to transfer an economic resource as a result of a past transaction or event. What is left if company were wound up

Question 13

Equity

Answer 13

The residual interest in the assets after deducting the liabilities

Question 14

Income

Answer 14

Increases in assets or decreases in liabilities that result in increases in equity

Question 15

Expense

Answer 15

Decreases in assets or increases in liabilities that result in decreases in equity

Question 16

Simulation modelling

Answer 16

Calculates NPVS based on key variables each with probabilities, runs simulation many times, allowing for a more informed decision

Question 17

Scenario analysis

Answer 17

Non-probabilistic approach providing info on possible outcomes by creating various possible scenarios - usually most likely, optimistic, pessimistic

Question 18

Sensitivity analysis

Answer 18

Non-probabilistic approach in project appraisal that analyses changes to assumptions made in forecast by ascertaining the sensitivity of changes to critical variables on the decision

Question 19

Accruals

Answer 19

transactions to
be accounted for in the period when income is earned or expenses are incurred, not when they are received and paid in
cash

Question 20

Going concern

Answer 20

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

Question 21

Materiality and aggregation

Answer 21

each material class of similar items should be presented separately and items that are dissimilar in terms of nature or function should be presented separately unless they are immaterial

Question 22

Reporting period

Answer 22

Entities should prepare financial statements at least annually
In unusual cases, where the end of an
entity’s reporting period is changed to less or more than one year, the entity should disclose:
* the reason for the change
* the fact that the comparative figures given are not entirely comparable

Question 23

Offsetting

Answer 23

Assets and liabilities and income and expenses shall not be offset unless required or permitted by a standard or an interpretation

Question 24

Social accounting

Answer 24

A commitment by businesses to behave ethically and contribute to economic development while remaining sensitive to the needs of all stakeholders.
Companies should make decisions based not only on financial factors, but also on social and environmental consequences of their actions. Over the last decade has moved from voluntary effort to subject to mandatory schemes.

Question 25

Environmental reporting

Answer 25

The process of communicating the environmental effects of an organisation’s economic actions through the corporate annual report of a separate environmental report.