lesson 1

Question 1

Who is responsible for preparing
Financial Statements?

Answer 1

A. Auditors
B. Directors
C. Shareholders
D. IFRS Consultants

B

Question 2

According to IAS1, the objective of general purpose
financial statements is ?

Answer 2

to provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions.

Question 3

what is agency conflict

Answer 3

managers have superior power in terms of accounting manipulations.
If risk earnings will not grow at a rate attractive to directors.
There is temptation to take various measures not in the interest of the
shareholders. - negatively affect firm
performance.

Question 4

What is the role of accounting in contracts ?

Answer 4

Contracting parties frequently define the rights between
themselves in terms of accounting numbers.

For example, the remuneration of directors and managers
might be expressed in terms of a salary plus a bonus based
on an agreed performance measure

Question 5

what cause agency conflicts in a firm ?

Answer 5

Temptation to manipulate numbers,In fact, managers have superior power in terms of accounting manipulations.
If risk earnings will not grow at a rate attractive to directors

Question 6

Are all share holders aware of accounting numbers actual truth ?

Answer 6

in general, shareholders are unaware that the accounting
numbers are not real.
Except….
A third party has vested interest in revealing adverse facts
following M&As

Question 7

Deferring discretionary expenditure- examples of accounting manipulations

Answer 7

research, advertising, training
expenditure.

Question 8

Deferring amortisation - examples of accounting manipulation

Answer 8

making optimistic sales projections in order to
classify research as development expenditure which can be capitalized.

Question 9

Reclassifying - examples of accounting manipulation

Answer 9

deteriorating current assets as fixed assets to avoid the
need to recognize a loss under the lower of cost and net realizable value
rule applicable to current assets.

Question 10

define Amortization

Answer 10

spreading the cost of intangible items such as software throughout use of years similar to depreciation

Question 11

General Features
in financial statements

Answer 11

General Features
* Fair presentation
* Compliance with international standards
* Going concern basis
* Accruals basis
* Materiality and aggregation
* Offsetting
* Frequency of reporting
* Comparative information
* Consistency of presentation

Question 12

Materiality and aggregation examples - CA of land is £50 000 and CA of furniture is £100 000.
Company’s materiality limit is £300 000. Disclosure
required in financial statements?
a) Combine land and furniture for disclosure
b) Disclose land and furniture separately on the face of
the SOFP
c) Disclose land and furniture separately in the notes

Answer 12

C

Question 13

What is the main objective of financial statements under IAS 1?

Answer 13

To provide useful financial info to stakeholders for economic decisions.

Question 14

Why are accounting standards necessary?

Answer 14

To ensure consistency, transparency, comparability, and limit manipulation.

Question 15

What is an example of accounting manipulation?

Answer 15

Delaying expense recognition to inflate profits

Question 16

What is an example of reclassifying assets to avoid losses?

Answer 16

Recording deteriorating current assets as fixed assets.

Question 17

What was the issue in the Tesco accounting scandal?

Answer 17

Prematurely recording estimated rebates as profit, overstating profit by £250m.

Question 18

What does IAS 1 govern?

Answer 18

Presentation of financial statements.

Question 19

What are the five key components of financial statements?

Answer 19

SOFP, SOCI, SOCIE, Statement of Cash Flows, Notes.

Question 20

What does “fair presentation” mean in IAS 1?

Answer 20

Faithful representation of financial position and performance.

Question 21

What is the going concern principle?

Answer 21

Assumes business will continue to operate for the foreseeable future.

Question 22

What is the accruals basis of accounting?

Answer 22

Revenues and expenses recorded when earned/incurred, not when cash is exchanged

Question 23

What is materiality in IAS 1?

Answer 23

Information that could influence users’ decisions must be disclosed.

Question 24

What is aggregation?

Answer 24

Grouping similar items unless dissimilar in nature/function

Question 25

When is offsetting allowed in financial statements?

Answer 25

Only when required/permitted by IFRS.

Question 26

What is offsetting in financial statements?

Answer 26

Netting assets against liabilities or income against expenses

Question 27

Give an example when offsetting is not allowed.

Answer 27

Profit from sale of a fixed asset not part of regular business must be disclosed separately.

Question 28

What is the minimum reporting frequency required by IAS 1?

Answer 28

Annually.

Question 29

When must changes in reporting period be disclosed?

Answer 29

When period ≠ 12 months — must disclose reason and comparability warning

Question 30

Why is comparative information important?

Answer 30

Ensures users can compare financials across periods

Question 31

When can presentation methods be changed?

Answer 31

If business operations change or IFRS requires it.

Question 32

What are the general features of financial statements?

Answer 32

Fair presentation, accruals, going concern, consistency, comparability, materiality, aggregation, offsetting, frequency.

Question 33

What is the role of accounting standards in wealth distribution?

Answer 33

Prevent manipulation that benefits management over shareholders

Question 34

How do standards impact bonuses?

Answer 34

They prevent inflating profits to unfairly increase performance-related pay.

Question 35

Why must estimates be used cautiously in financial reporting?

Answer 35

They can be misused to misrepresent profits.

Question 36

How does IAS 1 enhance investor confidence?

Answer 36

A: By enforcing consistent, transparent reporting.

Question 37

Can disclosure alone fix improper accounting treatment?

Answer 37

No — inappropriate treatment must be corrected.

Question 38

What happens when a company complies with all IFRS?

Answer 38

A: It must state compliance clearly and unreservedly in the notes.

Question 39

What is a financial statement’s role in the contract setting?

Answer 39

A: It can define entitlements, e.g. bonuses, loan covenants.

Question 40

Why might managers be tempted to manage earnings?

Answer 40

To meet performance targets, increase bonuses, or influence share price.

Question 41

What is the difference between faithful representation and neutral reporting?

Answer 41

Faithful = true to what it represents; neutral = unbiased.

Question 42

Statement of Financial Position (SOFP): purpose ?

Answer 42

Shows the company's assets, liabilities, and equity at a specific point in time (snapshot).

Question 43

Statement of Profit or Loss and Other Comprehensive Income (SOCI):

Answer 43

Shows the company’s income and expenses over a period to calculate profit or loss and includes other gains or losses not in regular profit.

Question 44

Statement of Changes in Equity (SOCIE): purpose

Answer 44

Shows changes in the company’s equity (e.g., profits, dividends, share issues) over a period.

Question 45

Statement of Cash Flows: purpose

Answer 45

Shows the movement of cash in and out of the company, grouped into operating, investing, and financing activities.

Question 46

Notes to the Financial Statements: purpose

Answer 46

Provide extra explanations and details about the numbers in the main statements, like accounting policies, breakdowns, or important events.

Question 47

Which component is prepared using IAS 7?

Answer 47

the Statement of Changes in Equity (SOCIE)

Question 48

"offsetting" Give an example.

Answer 48

A company must show sales revenue and cost of goods sold separately — not just show net profit from sales. But netting off tax assets and tax liabilities is allowed under IFRS.

Question 49

What is included in Other Comprehensive Income (OCI)?

Answer 49

Gains and losses that are not part of regular profit or loss, such as: Revaluation gains on assets Gains/losses on financial assets at fair value through OCI Foreign currency translation differences Remeasurements of defined benefit pension plans

Question 50

What is the difference between total comprehensive income and profit?

Answer 50

Profit = Income minus expenses (normal trading results). Total comprehensive income = Profit plus items of OCI (so it includes all changes in equity, except changes due to transactions with owners like share issues or dividends).

Question 51

What is the difference between presenting expenses by nature vs. by function?

Answer 51

By nature: Grouping expenses based on type (e.g., salaries, depreciation, rent). Shows what the money was spent on. By function: Grouping expenses by what they were used for (e.g., cost of sales, administration expenses, selling expenses). Shows what part of the business the spending supported.

Question 52

What key information must be disclosed in the Statement of Changes in Equity (SOCIE)?

Answer 52

otal comprehensive income for the period (profit + OCI) Contributions by and distributions to owners (e.g., share issues, dividends) Effects of changes in accounting policies or corrections of errors Reconciliation of opening and closing balances for each equity component (e.g., share capital, retained earnings)

Question 53

What are the three cash flow categories in IAS 7?

Answer 53

Operating activities: Cash flows from the company’s main business operations (e.g., cash from customers, payments to suppliers). Investing activities: Cash flows from buying/selling long-term assets (e.g., purchasing property, selling investments). Financing activities: Cash flows from changes in equity and borrowings (e.g., issuing shares, taking loans, repaying debt).