Characteristics of Financial Statements and Purpose of

Financial Reporting
1) Which of the following statements is true?
A. The directors of a company are liable for any losses of the company.
B. A sole trader business is owned by shareholders and operated by the proprietor.
C. Partners are liable for losses in a partnership in proportion to their profit share ratio.
D. A company is run by directors on behalf of its members.

2) Which of the following statements best defines a statement of profit or loss?

A. It is a summary of assets and expenses at a specified date
B. It is a summary of cash receipts and payments made during an accounting period
C. It is a summary of assets, liabilities and equity at a specified date
D. It is a summary of income and expenditure for an accounting period

3) Consider the following statements about going concern:

(i) Financial statements must always be prepared on the going concern basis
(ii) If a business is not considered to be a going concern, financial statements should not be
prepared

Which of the statements is/are correct?

A. (i) only
B. (ii) only
C. Both (i) and (ii)
D. Neither (i) nor (ii)

4) Which are the roles of IASB?

1. Responsibility for all IFRS technical matters;
2. Publication of IFRSs;
3. Overall supervision and governance of the IFRS Advisory Council;
4. Final approval of interpretations by the IFRS Interpretations Committee

A. 2 only
B. 1 and 2 only
C. 1, 2 and 4
D. 1, 2 and 3
5) Who issues International Financial Reporting Standards?
A. The IFRS advisory committee
B. The stock exchange
C. The International Accounting Standards Board
D. The government

6) Which accounting concept should be considered if the owner of a business takes goods from
inventory for their own personal use?
A. The materiality concept
B. The accruals concept
C. The going concern concept
D. The business entity concept

7) Sales revenue should be recognized when goods and services have been supplied; costs are incurred
when goods and services have been received.

Which accounting concept governs the above?

A. The business entity concept
B. The materiality concept
C. The accruals concept
D. The duality concept

8) Which accounting concept states that omitting or misstating this information could influence users
of the financial statements?
A. The consistency concept
B. The materiality concept
C. The accruals concept
D. The going concern concept

9) Which of the following accounting concepts means that similar items should receive a similar
accounting treatment?
A. Consistency
B. Accruals
C. Matching
D. Conformity
10) Listed below are some characteristics of financial information.
1. Relevance
2. Consistency
3. Faithful representation
4. Accuracy

Which TWO of these are qualitative characteristics of financial information according to the
IASB's Conceptual Framework for Financial Reporting?

A. 1 and 2
B. 2 and 4
C. 3 and 4
D. 1 and 3

11) Which ONE of the following statements describes faithful representation, a qualitative
characteristic of faithful representation?
A. Revenue earned must be matched against the expenditure incurred in earning it.
B. Having information available to decision-makers in time to be capable of influencing their
decisions.
C. The presentation and classification of items in the financial statements should stay the same
from one period to the next.
D. Financial information should be complete, neutral and free from error.

12) The IASB's Conceptual Framework for Financial Reporting gives six qualitative characteristics of
financial information.
What are these six characteristics?
A. Relevance, Faithful representation, Comparability, Verifiability, Timeliness and
Understandability
B. Accuracy, Faithful representation, Comparability, Verifiability, Timeliness and Understandability
C. Relevance, Faithful representation, Consistency, Verifiability, Timeliness and Understandability
D. Relevance, Comparability, Consistency, Verifiability, Timeliness and Understandability
13) Which of the following are advantages of trading as a limited liability company?
1. Operating as a limited liability company makes raising finance easier because additional shares
can be issued to raise additional cash.
2. Operating as a limited liability company is riskier than operating as a sole trader because the
shareholders of a business are liable for all the debts of the business whereas the sole trader is
only liable for the debts up to the amount he has invested.
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 or 2

14) According to the IASB Conceptual Framework which of the following is NOT an objective of
financial statements?
A. Providing information regarding the financial position of a business
B. Providing information regarding the performance of a business
C. Enabling users to assess the performance of management to aid decision making
D. Providing reliable investment advice
The Regulatory Framework
1. Who issues International Financial Reporting Standards?

A The IFRS Advisory Committee

B The Stock exchange
C The International Accounting Standards Board
D The government

A Corporate governance is the system of rules and regulations surrounding financial reporting.
B Corporate governance is the system by which companies and other entities are directed and
controlled.
C Corporate governance is carried out by the finance department in preparing the financial
statements.
D Corporate governance is the system by which an entity monitors its impact on the natural
environment.
2. Which of the following best describes corporate governance?

3. Identify which of the following statements are true.

1. The directors of a company are ultimately responsible for the preparation of financial
statements, even if the majority of the work on them is performed by the finance department.
2. Financial statements are audited, then the responsibility for those financial statements instead
falls on the auditors instead of the directors.
3. There are generally no laws surrounding the duties of directors in managing the affairs of a
company.

A 1 only
B 2 only
C 2 and 3 only
D 1 and 3 only
4. Which of the following statements is/are true?

1. Directors of companies have a duty of care to show reasonable competence in their

management of the affairs of a company.
2. Directors of companies must act honestly in what they consider to be the best interest of the
company.
3. A Director's main aim should be to create wealth for the shareholders of the company.

A. 1 and 2 only
B. 2 only
C. 1, 2 and 3
D 1 and 3 only

5. Which of the following statements is/are true?

1. The IFRS Interpretations Committee is a forum for the IASB to consult with the outside world.
2. The IFRS Foundation produces IFRSs. The IFRS Foundation is overseen by the IASB.
3. One of the objectives of the IFRS Foundation is to bring about convergence of national
accounting standards and IFRSs.

A. 1 and 3 only
B. 2 only
C. 2 and 3 only
D. 3 only

6. What is the main purpose of the IFRS Conceptual Framework for Financial Reporting?

A. To assist users in interpreting information contained in financial statements

B. To assist preparers of financial statements in applying standards
C. To assist national standard setting bodies in developing national standards
D. To assist the IASB in developing and reviewing standards

7. Which ONE of the following statements correctly describes how International Financial Reporting
Standards (IFRSs) should be used?

A. To provide examples of best financial reporting practice for national bodies who develop their
own requirements
B. To ensure high ethical standards are maintained by financial reporting professionals
Internationally
C. To facilitate the enforcement of a single set of global financial reporting standards
 D. To prevent national bodies from developing their own financial reporting standards

8. Which of the following accounting regulatory bodies is responsible for providing guidance on
disclosure requirements where there is uncertainty in the original standard?

A. IFRS Foundation
B. IFRS Interpretations Committee
C. IASB
D. IFRS Advisory Council

9. What is the role of IASB?

A. Oversee the standard setting and regulatory process.
B. Formulate international financial reporting standards.
C. Review defective accounts.
D. Control the accountancy profession.

10. Which ONE of the following is NOT one of the duties of a director?

A. To act in the best interest of the company

B. To appoint the company auditors and receive the audit report
C. To prepare the company's financial statements
D. To ensure that the company complies with the relevant laws and regulations

11. Which TWO of the following activities are duties or responsibilities of directors?

A. To disclose detailed risk management strategies.

B. To prepare understandable and transparent financial statements.
C. To appoint independent external auditors.
D. To determine whether the company is a going concern.

12. Which of the following are stages in the due process of developing a new International Financial
Reporting Standard?

1. Issuing a discussion paper that sets out the possible options for a new standard
2. Publishing clarification on the interpretation of an IFRS
3. Drafting an IFRS for public comment
4. Analyzing the feedback received on a discussion paper
 A. 1, 2 and 3
B. 2, 3 and 4
C. 1, 3 and 4
D. 1, 2 and 4

13. According to the International Accounting Standards Board, in whose interests are financial
reporting standards issued?

A. Company directors
B. The public
C. Company auditors
D. The government

14. The issue of a new IFRS means that:

1. An existing standard may be partially or completely withdrawn

2. Issues that are not in the scope of an existing standard are covered
3. Issues raised by users of existing standards are explained and clarified
4. Current financial reporting practice is modified

Which combination of the above will most likely be the result of issuing a new IFRS?

A. 1, 2 and 3
B. 2, 3 and 4
C. 1, 3 and 4
D. 1, 2 and 4
Answers

Characteristics of Financial Statements and Purpose of

Financial Reporting
1. D
The directors of a company run the company; however, they are not personally liable for its losses.
A sole trader business is owned and operated by the proprietor (sole trader).
Partners are jointly and severally liable for any losses of the business.
A company is owned by the shareholders (members) and run by the directors/management team.

2) D
A statement of profit or loss is a summary of income and expenditure for an accounting period.

3) D

4) C

5) C

6) D

7) C

8) B

9) A

10) D

11) D

12) A

13) A

14) D
The Regulatory Framework
1. C. The role of the IASB is to develop and publish International Financial Reporting Standards

2. B Corporate governance is the system by which companies and other entities are directed and

controlled.

3. A. The responsibility of the financial statement rest with the director, whether or not those
financial statements are audited. Some of the duties of directors are statutory duties, laid down in
law, including the duty to act within their powers, promote the success of the company and exercise
reasonable skill and care.

4. C. All three statements are true.

5. D The IFRS Advisory Council is a forum for the IASB to consult with the outside world. The IASB
produces IFRSs and is overseen by the IFRS Foundation.

6. D. To assist the IASB in developing and reviewing standards.

7. A One of the ways IFRSs are used is as an international benchmark for those countries which
develop their own requirements.

8. B The IFRS Interpretations Committee provides guidance on issues that have arisen on the
implementation of standards.

9. B. The role of IASB is to develop and publish IFRS.

10. B. The company auditors are appointed by the shareholders (although in practice the directors
may do this, the appointment is made on behalf of the shareholders) and the audit report is
addressed to the shareholders.

11. B and D. To prepare understandable and transparent financial statements is a duty of directors
and is necessary in order to reduce agency problems because directors are acting for investors who
require good quality information. To determine whether the company is a going concern is a duty of
directors and is part of the governance statement in the annual report.

12. C. The publication of interpretation is the function of Interpretation committee.

13. B. This is stated in the IASB’s objectives (“to develop, in the public interest, ...”). Whilst only
certain elements of the public may be users of the financial statements, the members of the public
as a whole are affected by the activities of companies and users of financial statements. Financial
information that is relevant and faithfully represents what it purports to represent underpins the
economies of all jurisdictions.

14. D. IFRSs are not issued to clarify users’ issues concerning application of an IFRS. (This is the
purpose of an IFRIC.)