Lecture 2

Question 1

Accounting equation

Answer 1

A = L + E
Profit (loss) = Income - Expenses
A = Assets
L = Liabilities
E =equity

Question 2

Equity definition

Answer 2

Residual interest in assets after deducting liabilities

Question 3

Income definition

Answer 3

Increases an assets or decreases in liabilities that increase equity not from contributions

Question 4

Expenses definition

Answer 4

Decreases an assets or increases in liabilities that decrease equity not distributions

Question 5

IASB - conceptual framework

Answer 5

Characteristics= relevance (makes difference in decisions), faithful representation (complete, neutral, free from error)
Other: comparability, verifiability, timelines, understandability

Question 6

Accrual meaning

Answer 6

Record revenues and expenses incurred

Question 7

Going concern meaning

Answer 7

Assume the business will continue to operate unless evidence suggests otherwise

Question 8

Historical cost meaning

Answer 8

Assets recorded at original purchase price

Question 9

Conservatism meaning

Answer 9

Choose the less optimistic view for example, record lower asset value and higher liability

Question 10

Depreciation formula and example

Answer 10

Depreciation = (cost - residual value) / useful life
Eg. £100,000 building, 10 year life, 10% depreciation per year
- annual depreciation = £10,000
Accumulated depreciation after 5years = £50,000

Question 11

Asset recognition

Answer 11

Assets must meet all 3
1. controlled by entity
2. right to economic benefit
3. result of past event

Question 12

Internally generated in tangible assets

Answer 12

Only development costs can be capitalised if 6 of 38 tests are passed
1. Technically feasible
2. Intend to complete
3. Ability to use or sell
4. Future economics benefit probable
5. Resources available
6. Reliable measurement

Question 14

Liability recognition

Answer 14

Must meet all 3
1. Present obligation
2. Transfer of resource expected
3. Arises from past event

Question 15

Types of liabilities

Answer 15

Liability = yes (outflow probable) yes (measurable)
Provision = yes or no (outflow probable) yes or no (measurable)
Contingent = no (outflow probable) no (measurable)

Question 16

Ethical issues in recognition

Answer 16

Assets = overstating asset values using aggressive assumptions and misclassifying research as development
Liabilities = underestimating provisions and not disclosing contingent liabilities