ACC704 - Tutorial 1 Questions

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ACC704 – Conceptual Framework 2_Tutorial 1_2022

Question 1
The IASBs Framework for the preparation and presentation of financial statements requires
financial statements to be prepared on the basis that they comply with certain accounting
concepts underlying assumptions and (qualitative) characteristics. Briefly explain the meaning
of the following five (5) concepts/assumptions given.
i. Matching/Accruals
The matching/accruals concept is the most fundamental principle of accounting which
requires recording revenues when they are earned and not when they are received in cash,
and recording expenses when they are incurred and not when they are paid.

ii. Substance over form


The substance over form concept is an accounting principle used to ensure that financial
statements give a complete, relevant, and accurate picture of transactions and events.

iii. Prudence
Under the prudence concept, do not overestimate the amount of revenues recognized or
underestimate the amount of expenses. Also, one should be conservative in recording the
amount of assets, and not underestimate liabilities. The result should be conservatively-
stated financial statements.

iv. Comparability
Enable assessment of relative financial position and performance. Similar items should be
treated in a consistent manner from one period to the next and from one entity to another
unless alternative treatments are more reliable and relevant. Effective disclosure is also
encouraged.

v. Materiality
The materiality concept, in accounting terms, assumes the significance that certain facts
or data have in the decision-making of a reasonable user, and how their inclusion or
omission within the financial statements will have consequences in the evaluation of past,
present, and future events.

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ACC704 – Conceptual Framework 2_Tutorial 1_2022

Question 2
For most entities applying the appropriate concepts/assumptions for inventories is an important
element in preparing their financial statements. Illustrate with an example how each of the
concepts/assumptions above may be applied to accounting for inventory.
i. Matching concepts are the principle that requires income earned and expenses incurred to
be matched during the accounting period under review. For example, the appropriate
inventory expenses, such as warehousing costs, lost or damaged items, and obsolete
products, must be matched with the period in which net sales occur so that the accounting
reports accurately reflect actual net income.
ii. Substance over form knowing that financial statements must give a complete, relevant,
and accurate picture of transactions and events. An example, in a perpetual inventory
system, inventory assets are referred to as Merchandise Inventory is recorded as a current
asset. As inventory is bought, sold, and returned by customers, a separate cost of goods
sold account is updated in real-time. Merchandise inventory is updated with sales and
returns also. This matches the COGS of the inventory itself with the performance of the
sale or return, hence putting both in the same period for the income statement. The
matching principle states that revenues and expenses should be recognized in the same
period they were related to each there.
iii. Prudence explains that do not overestimate the amount of revenues recognized or
underestimate the amount of expenses when preparing the financial statements. For
example, inventory is recorded at a lower cost or net realizable value rather than the
expected selling price. This ensures profit on the sale of inventory is only realized when
the actual sale takes place. However, prudence does not require management to
deliberately overstate its liabilities and expenses or understate its assets and income. The
application of prudence should eliminate bias from financial statements but its
application should not reduce the reliability of the information.
iv. Comparability justify that financial statements of one accounting period must be
comparable to another in order for the users to derive meaningful conclusions about the
trends in an entity’s financial performance and position over time. For example, if a
company that retails leather jackets valued its inventory on the basis of the FIFO method
in the past, it must continue to do so in the future to preserve consistency in the reported
inventory balance. A switch from FIFO to LIFO basis of inventory valuation may cause a
shift in the value of inventory between the accounting periods largely due to seasonal
fluctuations in price.
v. Materiality in any financial accounting statement, there are some transactions that are too
small to be recognized and such transactions might not have any impact on the analysis
of the financial statement by an external observer. An example, if a company has a large
inventory, the company may want to focus on the items that are most expensive or that
are selling the most.

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ACC704 – Conceptual Framework 2_Tutorial 1_2022

Question 3
An important aspect of the IASB Framework for the preparation and presentation of financial
statements is that transactions should be recorded on the basis of their substance over form.
Explain why it is important that financial statements should reflect the substance over
the form of the underlying transactions that may be different from their legal form.
 The substance over form is an accounting concept which means that the economic
substance of transactions and events must be recorded in the financial statements
rather than just their legal form in order to present a true and fair view of the affairs of
the entity. The substance over form concept entails the use of judgment on the part of
the preparers of the financial statements. It is done in order for them to derive
business sense from the transactions and events taking place in the future.

Question 4
What is the main reason for developing a conceptual framework?
 Is to present the researcher's synthesis of literature and how to explain the concept so
that the reader would understand it properly.
 Gives a framework for setting accounting standards; a basis for resolving accounting
disputes, and fundamental principles; which do not have to exist repeated in
accounting standards
 Can exist categorized in terms of the distinctive; function of management accounting
within the management process in organizations.
 How the utility of the outcomes of the management accounting process can exist
tested?
 Is a criterion that can exist used to assess the value of the processes; and, work
technologies used in management accounting and capabilities are necessarily
associated with the effectiveness of the management accounting function overall.

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ACC704 – Conceptual Framework 2_Tutorial 1_2022

Question 5
What is the difference between conceptual framework and accounting standard?
 Conceptual frameworks and accounting standards serve different purposes. Conceptual
framework deals with general issues for example definition of assets applies to all assets
and provides a foundation for the standards. Whereas, accounting standards deals with
specific issues, particularly measurement and disclosure (IAS2 Inventory, IAS16 Non-
Current Assets, IAS41 Agriculture [Biological Assets].)

Question 6
What is the general purpose financial statements (GPFS)?
 General-purpose financial statements are the financial statements that are issued by the
management at regular intervals, usually, on a monthly, quarterly, semi-annual, and
annual basis. Such statements help investors and creditors interpret the business and
financial condition of the company so that they can take informed investment decisions.

Question 7
Discuss two assumptions that general purpose financial reports (GPFR) are based on.
 The first assumption that GPFR is based on is that relevance. Relevance is a fundamental
qualitative characteristic of financial reporting. Under the conceptual framework,
information is regarded as relevant financial information capable of making a difference
in the decision being made by the users. Information may be capable of making a
difference in a decision even if some users choose not to take advantage of it or are
already aware of it from another source. The second assumptions are a faithful
representation. According to the conceptual framework, to be useful, financial
information must not only represent relevant phenomena but must also faithfully
represent the phenomena that it supports to represent. In order to be a perfectly faithful
representation, it must be involved three characteristics such as it would be complete,
neutral, and free from error or bias.

Question 8
Who are the perceived recipients for the general-purpose financial statements (GPFS)?
 The perceived recipients for the general-purpose financial statements usually issued to
the board of directors, potential investors, lenders and other creditors in making decisions
about proving resources to the entity.

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