Deck 3: The Conceptual Framework: Definition, recognition and Measurement of the Elements in General Purpose Financial Statements

Question 1

The recognition of an element of a financial statement is:

A) a description of the element in the notes to the financial statement
B) an action or process to record the transaction or event in the accounting records
C) a statement identifying the characteristics that an element must have
D) both A and C

Answer 1

B

Question 2

How is the concept of aggregation best summarised?

A) as the property that provides relevant information that is a faithful representation
B) different properties are measured and different scales are used
C) the measurement scale can be defined by several different bases
D) comparable characteristics of all elements should be measured using the same scale

Answer 2

D

Question 3

Which of the following is not an advantage of the contract-price method?

A) It is simple to apply
B) It ignores the time value of money
C) It recognizes the interest obligation as a liability
D) It relies on readily verifiable documentary evidence

Answer 3

C

Question 4

The key characteristic used by the Framework to define an asset is:

A) saleability
B) type of item
C) ability to generate future economic benefits
D) ability to generate future cash flows

Question 5

The estimated current net market value of an asset in the ordinary course of business is known as:

A) opportunity cost
B) replacement cost
C) current cash equivalent
D) discounted value of future cash flows

Question 6

In accounting,'value' can mean:

A) historical cost
B) market value
C) replacement cost
D) any of the above

Question 7

Under the Framework,a transport company does not regard the road outside its premises as an asset because:

A) it is not owned
B) it will not provide future economic benefits
C) the amount of future economic benefits is uncertain
D) it is not controlled

Question 8

AASB 137 'Provisions,Contingent Liabilities and Contingent Assets' requires information about contingent liabilities to be disclosed in a note to the financial statements where the probability of a future sacrifice of economic benefit is:

A) higher than remote
B) above 20%
C) between 25% and 50%
D) above 50%

Question 9

The Framework defines assets as:

A) resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
B) probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
C) the service potential expected from resources controlled by the reporting entity as a result of past events
D) future economic benefits expected from resources controlled by the reporting entity as a result of past events

Question 10

Which of these is not an essential characteristic of a liability under the Framework?

A) Future sacrifice of economic benefits
B) Control
C) Existence of a present obligation to another entity
D) A past transaction or other past event

Question 11

Under the Framework,assets should be recognised in the balance sheet when:

A) future economic benefits can probably be measured reliably
B) future economic benefits are relevant, reliable and material
C) future economic benefits are probable and cost or value can be measured reliably
D) future economic benefits are relevant and can be measured reliably

Question 12

Measuring and reporting assets using historical cost is most relevant in satisfying:

A) the stewardship objective of financial reporting
B) the decision usefulness objective of financial reporting
C) the objectives of relevance and reliability in financial reporting
D) both A and B

Question 13

An entity has decided to commit itself to the purchase of a new building in the next financial year.Under the Framework:

A) a liability exists because it is probable that a future sacrifice of economic benefits will be required
B) no liability exists because there is no present obligation
C) a liability exists because there is a constructive obligation
D) a liability exists because there is an equitable obligation

Question 14

Which of the following is not considered an element of the statement of financial position?

A) Liabilities
B) Equity
C) Expenses
D) Assets

Question 15

Which of these is the strongest argument in favour of current replacement cost as an alternative to historical cost?

A) Current replacement cost provides a more reliable measure of performance
B) Current replacement cost provides a more relevant measure of performance
C) Current replacement cost provides a more reliable balance sheet
D) Current replacement cost provides better information on cash flows

Question 16

Future economic benefits for assets come from:

A) value-in-utility
B) value-in-exchange
C) value-in-use
D) both B and C

Question 17

In the Framework,'the 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' is the definition of:

A) revenues
B) assets
C) expenses
D) liabilities

Question 18

Which of the following provides an example of measurement based on a nominal scale?

A) Postcode
B) Temperature using centigrade
C) Temperature using Fahrenheit
D) The outcome of an election process

Question 19

What is the term for the action or process of recording a transaction or event in an entity's accounting records?

A) Recording
B) Valuation
C) Aggregating
D) Recognition

Question 20

In the Framework,'probable' means:

A) greater than 50% certainty
B) 50% certainty
C) greater than 75% certainty
D) greater than 95% certainty

Question 21

Which statement is incorrect?

A) Net assets, net worth, shareholders' equity and proprietorship are all synonyms for equity
B) The settlement of a liability by the owner from his private funds results in an increase in equity
C) Under the Framework equity exists only because there are assets and liabilities
D) None of the statements is incorrect, i.e., all are correct

Question 22

Explain and discuss three essential characteristics of an asset as defined by the Framework.

Question 23

Discuss the different theories concerning how liabilities should be measured.

Question 24

What characteristic is emphasised in the definition of income?

A) flow
B) change in stock
C) presentation
D) disclosure

Question 25

Under the Framework,which of these statements is correct?

A) A distinction is made between profit and gains
B) Profit is not defined independently of income and expenses
C) Profit is defined as the amount that can be distributed as a dividend whilst maintaining capital intact
D) None of the statements is correct

Question 26

Under the Framework,profit is defined as:

A) an increase in 'well-offness'
B) a matter of display
C) an increase in wealth
D) including all changes in equity occurring during a period

Question 27

Under the Framework,the purchase of inventory by an entity is:

A) an expense as it decreases equity
B) an expense as it arises from carrying out the major activities of the entity
C) an expense because it is a flow
D) not an expense

Question 28

Under the Framework,which of these is not an essential characteristic of an expense?

A) It must result in a decrease in equity
B) It must represent a flow
C) It must be associated with the earning of revenue
D) It must take the form of a decrease in an asset or an increase in a liability

Question 29

The Framework definition of revenue (income)differs in which important aspect from the FASB definition?

A) In some circumstances it includes contributions by owners as revenue
B) It includes a reduction in liabilities as one of the forms that revenue can take
C) It defines revenue as an inflow
D) It does not identify the sources of the revenue

Question 30

Depreciation and wages that have been accrued represent,respectively,expenses resulting from:

A) a decrease in an asset: a decrease in a liability
B) the using up of an asset: an increase in a liability
C) the using up of a liability: an increase in an asset
D) none of the above

Question 31

List and explain the four types of measurement scales.

Question 32

According to Framework 2014,when should income be recognised?

A) When cash is received
B) On the date listed on the statement of financial position
C) On a straight-line basis in accordance with fixed assets
D) When it is probable that an increase in economic benefits has occurred

Question 33

In the Framework's definition of expenses:

A) there is no distinction between expenses and losses
B) expenses must be matched against income
C) the causes of expenses are specifically identified
D) if the definition is satisfied the item must be recognised in the financial statements

Question 34

Compare the FASB definition of revenue and the Australian concept of income.In your answer discuss the treatment of gains in both jurisdictions.