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Chapter 1

1 B The primary aim of accounting is to provide financial information for users.

2 D The shop is the only business entity, the remainder are all non-profit making entities and exist to fulfil a particular aim rather than to earn profits.

3 B Management accountants produce financial information that is useful to the management of an organisation, such as budgets. Financial accountants generally produce the financial

statements, and the directors produce various narrative reports.

4 C Lenders and shareholders in particular are identified as the primary users of financial statements. Information produced with them in mind should also be useful for other user groups, however these other groups are not considered to be the main audience of financial accounts.

5 C Neither a sole trader nor a partnership with no employees need human resource functions and therefore A and B are discounted. A retail organisation does not need a sales function and therefore D is discounted. A multinational organisation needs all of the functions mentioned and possibly others.

6 A

7 A The financial manager is responsible for raising finance and controlling financial resources. The management accountant presents accounting information to support the management of the business. The financial accountant reports the results and financial position of a business.

8 B Purchasing-system tests are based around buying and goods inwards. The equivalent for sales would be selling and goods outwards. Payroll concerns the payment of wages and salaries.

Cash management focuses on the authorisation, verification and recording of payments and receipts.

9 A Although the double entry system may not be as visually apparent as it is in a manual system, it still underpins accounting, regardless of the method of data capture.

10 D When a computerised system suffers a technical problem, work can not continue until the problem is corrected.

Chapter 2

1 B The IASB is not concerned with the currency in which financial statements are prepared.

2 B IFRSs to be used for consolidated financial statements.

3 B The IASB has no powers of enforcement.

4 C The IFRS Interpretation Committee interprets the application of IFRS and provides guidance on topics not specifically covered by an IFRS.

5 D GAAP is all the rules and regulations a company must follow so can include national as well as international standards.

6 C A,B and D are all perceived as disadvantages of the regulation of company accounts: more disclosure is required; the extra work involved in adhering to regulations is costly and competitors have access to more information which they may use to their advantage.

Regulation does, however, result in higher quality, more comparable, relevant and reliable information.

7 C International Accounting Standards were issued by the IASB’’s predecessor, the IASC.

8 D The IASB is focused on a program of harmonisation with the US standard-setter, FASB.

Chapter 3

1 C A conceptual framework is sometimes referred to as a ‘‘guiding light’’ which underpins accounting standards.

2 D The framework provides the principles which underpin all IFRS; in addition its principles are applied where no standard exists. Therefore all transactions are effectively accounted for in line with the Framework, so resulting in standardised accounting practice.

3 C The Framework for the Preparation and Presentation of Financial Statements was issued in 1989 by the IASB in order to provide general principles underpinning accounting. It is in the process of being replaced.

4 C All are valid reasons that financial statements are produced, but the key reason is C.

5 B They are all uses of the financial statements.

6 A The management have the ultimate responsibility for the preparation of financial statements although they may delegate this to accountants within their organisation.

7 D The statement of financial position shows financial position; the statement of cash flows and the statement of changes in equity show changes in financial position.

8 C The underlying principles contained within the conceptual framework should be applied.

Chapter 4

1 B A principles based system involves applying underlying general principles to all transactions.

2 B All published financial statements must be true and fair (or fairly presented). A true and fair override arises where a company does not follow the requirements of an IFRS in order to achieve a true and fair presentation.

3 D The other arguments are all in favour of accounting standards.

4 B These are the four qualitative characteristics contained within the Framework which make financial information useful to users.

5 B Where a business is a going concern, it is anticipated that the business will continue to trade for the foreseeable future (being at least 12 months). Therefore assets should be measured at their value to the business (carrying value) rather than at their sale value (break-up value).

6 A The accruals concept requires that the effects of transactions are recognised when they occur, so meaning that credit sales and purchases, for example, are included in the income statement for a period.

7 D Although the issue of a discussion paper is not a mandatory step in due process, this would be issued before the (mandatory) exposure draft, and in due course a final standard.

8 B Only IFRS have been published by the IASB.

9 B Investors will benefit as financial statements will be more comparable.

10 C The FASB is the US standard setter. It is working with the IASB on a number of projects, including that to develop a new conceptual framework.

Chapter 5

1 C This is the definition of an asset contained within the Framework and various IFRSs.

2 B This is the definition of a liability contained within the Framework and various IFRSs. A is the definition of equity; C is the definition of an asset; D is a mixture of the definitions of a liability and an asset.

3 B There are two elements to the recognition criteria: a probable flow of economic benefits and reliable measurement. The ‘‘past event’’ criteria forms part of the definitions of an asset and liability and is not repeated within the recognition criteria.

4 C Assets, liability and equity are included in the statement of financial position.

5 B Motor vehicles are generally a non-current asset, however motor vehicles held for sale are current assets in accordance with IFRS. Property, plant and equipment and licences are non-current assets of a business; retained earnings are part of the equity in a business.

6 B A bank loan is a liability of a business and inventory is a current asset.

7 C An overdraft is classed as current, even where there is a rolling facility, as it is repayable on demand.

8 C Payable accounts are part of the normal operating cycle of a business, and as such are classified as current liabilities, even where the credit period exceeds 12 months.

9 D A, B and C are all assets.

10 A IAS 1 requires that assets are classified as current where they are expected to be realised in an entity’’s normal operating cycle, are held primarily for trading, are cash or a cash equivalent or are expected to be realised within 12 months of the reporting date.

Chapter 6

1 A Under the historic cost convention, assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition.

2 C Historical cost is the only measurement basis listed: business entity is concerned with the separation of a business from its owner; money measurement requires that every transaction is measured in terms of money; going concern is the assumption that a business will continue to trade for the foreseeable future.

3 C If non-current assets are retained in the books at their historical cost, unrealised holding gains are not recognised, so resulting in the understatement of assets. Similarly profits are

overstated because many costs, such as opening inventory, are historic and recorded at out of date prices compared to revenue which is recorded at more recent prices.

4 B Historical cost is the measurement basis most widely applied in financial statements.

5 B The prudence concept requires that assets are not overstated and liabilities not understated.

It does not, however, mean that the understatement of assets and overstatement of liabilities is desirable.

6 C Assets will tend to be understated and profits overstated due to low depreciation charges.

7 C $8 000 u 7 years = $56 000

8 A Proceeds $1 900 less costs to sell of $800 = $1 100

Chapter 7

1 A Normative accounting theory explains what should occur rather than predicting what actually does occur.

2 B This is the definition of fair value provided within a number of IFRSs.

3 B Financial capital maintenance makes no reference to the operating capacity of a business or whether profits made are sufficient to continue to operate at a previous level. Instead, it concentrates simply on monetary profit.

4 B A refers to general price inflation.

5 A B refers to current cost accounting.

6 C The deprival value of an asset is the amount that a business would lose if the asset were damaged or lost. It is the lower of replacement cost and recoverable value.

7 D Deprival value is the lower of replacement cost and recoverable value. Recoverable value is the higher of sales value (net realisable value) and value in use (economic value).

8 A

Chapter 8

1 C An agency relationship involves a contract under which the principals engage the agent to perform some service on their behalf and delegate some decision-making authority to the agent.

2 B Company directors owe a fiduciary duty to a company to exercise their powers in what they honestly consider to be the interests of the company. This duty is owed to the company and not generally to individual shareholders.

3 A

4 D Other mandatory items include the statement of financial position, statement of cash flows and statement of changes in equity. Narrative reports such as a risk review and

environmental report are not mandatory, however may be included in annual accounts.

5 A The corporate governance report is required as part of the listing rules.

6 C Per IAS 1, the accounting policies must be disclosed. Corporate governance would be good practice but as the company is unlisted it is not mandatory.

Chapter 9

1 A If financial markets allow funds to be directed towards companies which make the most productive use of them, then there is allocative efficiency in these markets.

2 C Allocative efficiency is explained above; financial markets have operational efficiency if transaction costs are kept as low as possible; weak-form efficiency implies that prices reflect all relevant information about past price movements and their implications.

3 C Semi-strong form efficiency implies that prices reflect past price movements and publicly available knowledge.

4 D Strong form efficiency implies that prices reflect past price movements, publicly available knowledge and inside knowledge.

5 C A dividend decrease is usually viewed by markets to be bad news, but it may be that the market will react to the difference between the actual dividend payments and the market's

expectations of the level of dividend. If the market was expecting an increase in dividend, or at the very least, not expecting a reduction in dividend, the share price would decrease on

announcement of the reduced dividend, therefore A, C and D are incorrect.

Answers to self-assessment