IFRS - Chapter 2

Question 1

A conceptual framework establishes…

Answer 1

the concepts that underlie financial reporting

Question 2

What is the objective of financial reporting?

(IFRS)

Answer 2

Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers.

Question 3

What are the five objectives of financial reporting?

(GAAP)

Answer 3

1. Usefulness
2. Understandability
3. Target Audience: investors and creditors
4. Evaluating economic resources
5. Primary focus on earnings

Question 4

What are the fundamental qualities of financial information?

Answer 4

1. Relevance
2. Faithful Representation

Question 5

What are the “ingredients” of relevance?

“confirm the prediction”

Answer 5

1. Predictive value
2. Confirmatory value

Question 6

What are the “ingredients” of faithful representation?

“completely neutral is free from error”

Answer 6

1. Completeness
2. Neutrality
3. Free from error

Question 7

Define relevant

Answer 7

Accounting information that is capable of making a difference in a decision

Question 8

Define predictive value

Answer 8

Financial information that can used by investors to form their own expectations about the future

Question 9

Define confirmatory value

Answer 9

Financial information that heps users to confirm or correct prior expectations

Question 10

Define faithful representation

Answer 10

The numbers and descriptions match what really existed or happened

Question 11

To be relevent…

Answer 11

financial information needs to have at least one of:

• predictive value, or
• confirmatory value

Question 12

To be a faithful representation…

Answer 12

information must be complete, neutral, and free of material error (need all 3)

Question 13

Define completeness

Answer 13

All the information that is necessary for faithful representation is provided

Question 14

Define neutrality

Answer 14

A company cannot select information to favor one set of interested parties over another; unbiased

Question 15

Define free from error

Answer 15

Financial information is free from material error

Question 16

What are the enhancing qualities?

“compare and verify in time to understand”

Answer 16

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 17

Define comparability

Answer 17

Comparability enables users to identify the real similarities and differences in economic events between companies

Question 18

Define consistency

Answer 18

Application of the same accounting treatment to similar events, from period to period within a company

Question 19

Define verifiability

Answer 19

when independent measurers, using the same methods, obtain similar results

Question 20

Define timeliness

Answer 20

having information available to decision-makers before it loses its capacity to influence decisions

Question 21

Define understandability

Answer 21

the quality of information that lets reasonably informed users see its significance

Question 22

Define asset

Answer 22

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 23

Define liability

Answer 23

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 24

Define equity

Answer 24

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

Question 25

Define **income**

Answer 25

**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 26

Define **expenses**

Answer 26

**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 27

What are the **basic elements** of financial statements?

Answer 27

1. Assets 2. Liabilities 3. Equity 4. Income 5. Expenses

Question 28

What are the **basic assumptions**?

Answer 28

1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity 5. Accrual basis

Question 29

Define **economic entity assumption**

Answer 29

A company keeps its activity separate and distinct from its owners and any other business unit

Question 30

Define **going concern assumption**

Answer 30

The company will have a long enough life to fulfill their objectives and commitments

Question 31

Define **monetary unit assumption**

Answer 31

money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis

Question 32

Define **periodicity assumption**

Answer 32

a company can divide its economic activities into artificial time periods

Question 33

Define **accrual basis of accounting**

Answer 33

transactions that change a company’s financial statements are recorded in the periods in which the events occur

Question 34

What are the **basic principles of accounting**?

Answer 34

1. Measurement 2. Revenue Recognition 3. Expense recognition 4. Full disclosure

Question 35

What are the two **measurement principles**?

Answer 35

1. Cost 2. Fair value

Question 36

Define **cost**

Answer 36

Acquisition price

Question 37

Define **fair value**

Answer 37

the amount for which an asset could be exchanged

Question 38

Define the **revenue recognition principle** *(IFRS)*

Answer 38

revenue is to be recognized when it is **probable** that **future economic benefits** will flow to the company and **reliable measurement** of the amount of revenue is possible

Question 39

Define the **revenue recognition principle** *(GAAP)*

Answer 39

Revenue is **recognized when realized** (when the company receives cash or claims to cash) **and earned** (when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues)

Question 40

Generally, when is revenue recognized?

Answer 40

At the time of sale

Question 41

Define the **expense recognition principle**

Answer 41

"let the expense follow the revenues"

Question 42

Define the **full disclosure principle**

Answer 42

providing information that is of sufficient importance to influence the judgment and decisions of an informed user

Question 43

What are the two **constraints** of financial reporting?

Answer 43

1. Cost 2. Materiality

Question 44

Define the **cost constraint**

Answer 44

weighing the costs of providing the information against the benefits that can be derived from using it

Question 45

Define the **materiality constraint**

Answer 45

An item is material if its inclusion or omission would influence or change the judgment of a reasonable person