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For capital markets to work efficiently, relevant and reliable financial information must be provided so that users can make informed investment decisions. This unit places emphasis on the financial reporting environment and the many factors affecting it.



Essential characteristics of accounting are: (a) (b) (c) Identification, measurement and communication of financial information about Economic entities to Interested parties

Financial Accounting is the process that culminates in the preparation of financial reports on the enterprise as a whole for use by both internal and external parties. Users of financial reports include investors, creditors, managers, unions and government agencies. Financial statements are the principle means through which financial information is communicated to those outside an enterprise. These statements provide the companys history quantified in monetary terms. The financial statements most frequently provided are: (a) (b) (c) (d) the balance sheet, the income statement, the cash flow statement, and the statement of changes in equity.

In addition, note disclosures are an integral part of each financial statement. Some financial information is better provided, or can be provided, only by means of financial reporting other than formal financial statements. Examples include the CEOs report, managements forecasts, news releases, and certification regarding internal control and fraud. Such information may be required by authoritative pronouncements, regulatory rule, or custom. Or it may be supplied because management wishes to disclose it voluntarily.



Because resources are limited, people try to conserve them, to use them effectively, and to identify and encourage those who can make efficient use of them. Through an efficient use of resources, our standard of living increases. Markets, free enterprises, and competition determine whether a business is to be successful and thrive. This fact places a substantial burden on the accounting profession to measure performance accurately and fairly on a timely basis, so that the right managers and companies are able to attract investment capital. For example, relevant and reliable financial information enables investors and creditors to compare the income and assets employed by such companies as IBM, McDonalds, Microsoft and Ford. As a result, they can assess the relative returns and risks associated with investment opportunities and so channel resources more effectively. An effective process of capital allocation is critical to a healthy economy. It promotes productivity, encourages innovation, and provides an efficient and liquid market for buying and selling securities and obtaining and granting credit.



Although financial statements and related disclosures have captured and organised financial information in a useful and reliable fashion, much still needs to be done. For example, suppose you could move to the year 2020 and look back at financial reporting today. Here is what you might read:

(a) Non-financial Measurements: Financial reports failed to provide some key performance
measures widely used by management. For example, non-financial measures such as customer satisfaction indexes, backlog information, and reject rates on goods purchased; all now used to evaluate the long-term stability of the company were provided on an ad hoc basis, if at all. (b) Forward-looking Information: Financial reports failed to provide forward-looking information needed by present and potential investors and creditors. One individual noted the financial statements in 2000 should have started with the phrase Once upon a time to signify their use of historical cost and their accumulation of past events. (c) Soft Assets: Financial reports focused on hard assets (inventory, plant assets) but failed to provide much information on a companys soft assets (intangibles). For example, often the best assets are intangibles, such as Microsofts know-how and market dominance, Dells unique marketing setup and well-trained employees, and J. Crews brand image. (d) Timeliness: financial statements were prepared only quarterly, and audited financial were provided annually. Little or no real-time financial statement information was available.



The main controversy in setting accounting principles is; Whose rule should we play by, and what should they be? The answer is not immediately clear because the users of financial accounting statements have both coinciding and conflicting needs for information of various types. To meet these needs, and to satisfy the fiduciary reporting responsibility of management, a single set of general-purpose financial statements is prepared. These statements are expected to present fairly, clearly and completely the financial operations of the enterprise. As a result, the accounting profession has attempted to develop a set of principles that are generally accepted and universally practiced. Without the principles, each enterprise would have to develop its own principles, and readers of financial statements would have to familiarize themselves with every companys peculiar accounting and reporting practices. It would be almost impossible to prepare statements that could be compared. This common set of principles and procedures is called generally accepted accounting principles (GAAP). The term generally accepted means either that an authoritative accounting rule-making body has established a principle of reporting in a given area or that over time a given practice has been accepted as appropriate because of its universal application.



A number of organisations are instrumental in the development of financial accounting principles (GAAP) in Jamaica. These are established both on the legal and the professional levels. The Legal Environment (A) Various legislations have been enacted to regulate and to guide the procedures and principles involved in the preparation of financial statements.

Among the more established regulators within the legal environment in Jamaica is the Government, which is responsible for issuing the following Acts:

(i) (ii) (iii)

The Jamaican Companies Act: Application to both private and public companies. The Banking Act: The Financial Institutions Act: Applicable to all commercial banks. Applicable to merchant banks

Note that both the Banking and Financial Institutions Acts contain more specific accounting requirements over and above that stipulated in the Companies Act. The Jamaican Companies Act The original concern of the act was to afford some protection to the providers of capital (the shareholders), where day to day internal management was carried out by the directors, ensuring that the shareholders were given adequate information to judge whether the company was being managed efficiently and to determine the trading position, profit and value of the company. The Act provides for the rules and regulations that govern the incorporation, regulation and winding up of Jamaican companies. Sections 142- 156 state the broad requirements for the accounts and audit of a company. Section 142 of the Act provides that a company must keep proper books of accounts. On completion of the final accounts, Sections 150 and 151 require that the statements should be: (a) Signed by two or three directors on behalf of the Board (b) Circulated to all members of the company, all debenture holders, and to all other persons so entitled, not less than twenty-one days before the annual general meeting (c) Tabled in the annual general meeting (d) Included in the annual returns that are made to the Registrar of Companies (B) Jamaica Stock Exchange (JSE)

In addition to the above, additional information is required of those companies who have their shares listed on the stock exchange. Rules relating to companies listed on the Jamaica Stock Exchange can be obtained from the following source: The Securities Act provides the necessary principles that companies listed on the Jamaica Stock Exchange must adhere to. Among the specific requirements of the Stock Exchange are: (a) Quarterly Financial Statements

All companies should submit to the Stock Exchange two (2) copies of their quarterly financial statements, within forty-five (45) days of the end of the period to which the statements relate. (b) Annual Financial Statements

Similar to the requirements for quarterly financial statements, companies must also submit their annual financial statements. These would be all-encompassing for the period, and would also include comparative analysis of the previous year; as well as appropriate disclosures and supplementary information. The annual financial statements must be submitted no later than ninety (90) days after the year-end date. (c) Annual Report

Along with the financial statements, companies must also circulate copies of annual reports. Within onehundred-and-twenty (120) days of the companys financial year-end, a printed copy of the companys Annual Report, which shall include the shareholdings of directors and senior management and their connected persons, shall be forwarded to each of the companys share/stockholders and six (6) copies forwarded to the Stock Exchange. Generally the annual report should contain the following items: 1. 2. 3. 4. 5. 1. The directors report The report of the auditors the financial statements Notes the accounts Statements of Accounting Policies

The Directors Report In this report the directors give a brief description of the results for the year along with information on some of the following items: a. b. c. d. e. Dividends for the year Future developments A listing of the different directors and their individual interests (holdings) Major subsequent events Any research and development in progress


The Report of the Auditors This report covers the information contained in the four financial statements: The income statement, statement of changes in equity, balance sheet and cash flow statements. The auditors are appointed by, and are responsible to the members (shareholders) of the company and must report to them on the accounts prepared by the directors. Note- The directors are responsible for preparing the accounts. The audit report does not certify the accuracy of the accounts but instead it expresses the opinion that the accounts show a true and fair view. Also of note is that auditors must be qualified and are also expected to exercise an appropriate level of skill and judgment throughout their work.


The Financial Statements These include the income statement, statement of changes in equity, balance sheet and cash flow statement. Although these are the primary ones, others may be included e.g. Group related information (group companies), multi-year summaries etc.


Statements of Accounting Policies This section may include the identification of the company (location) and its principal activities (nature of the companys business), the basis used in preparing the financial statements, the rationale for the use of estimates by management etc.


Notes to the Accounts Included here is information which supplements as well as details summary data included in the major statements e.g.

a. b. c. d.

Details of fixed assets showing movement throughout the year Details of shared capital Details of the earnings per share calculation, taxation and dividends Other information including: exceptional items, extraordinary items, contingencies, subsequent events etc.

The Professional Environment Among the more established regulators within the professional environment in Jamaica is The Institution of Chartered Accountants of Jamaica (ICAJ) Institute of Charter Accountants of Jamaica (ICAJ) In light of current practice, the Companies Act sets out only the minimum provisions for disclosure in the accounts, leaving some requirements open to varying interpretations. In order to obtain the desirable levels of communication, comparability, consistency and disclosure, the accountancy profession found it necessary to lay down specific recommendations and principles to guide its members in the preparation of financial statements. In Jamaica these recommendations and principles, after the practice internationally are called standards, but more specifically are designated International Accounting Standards (IAS) The formation of the Institute of chartered Accountant of Jamaica (ICAJ), the passing of the Companies Act and the Public Accountancy Act 1969, all contributed to the development of accountancy in Jamaica. The latter Act established the ICAJ as a body corporate with certain responsibilities such as the acceptance and regulation of its students and members. In 1989 Jamaica joined with other Institutes of Chartered Accountants in the region in the formation of the Caribbean Institute of Chartered Accountants, an apex body which works towards harmonization of the profession within the Caribbean. Current Standard Setting Bodies In general, published accounts are required to conform to relevant accounting standards. Different bodies are established specifically to issue accounting standards. The main objective of issuing standards is to obtain a desired level of communication, comparability, consistency and disclosure. The accounting profession found it necessary to lay down specific recommendations and principles to guide its members in the preparation of financial statements. The current structure of bodies is as follows: COUNTRY Major Body Standard Setting Body Standards JAMAICA ICAJ IASB IFRS (IAS) USA FASB FASB SFAS UK FRC ASB FRS INTERNATIONAL IASC IASB IFRS (IAS)

International Standard Setting Body The International Accounting Standard Committee (IASC) has been working for more than 25 years to develop a set of accounting standards which can be used to bring about uniformity in financial reporting around the world. Uniform accounting will reduce the cost of preparing financial statements for multinational companies and perhaps more importantly, facilitate the jobs of investment analysts, investors, and other users in assessing business results. Until recently few people were very concerned about the differences in accounting standards. But as companies become more international in scope, a need exists for accounting standards that will allow users to make valid comparisons among the financial statements of companies located in different countries. More and more companies are thinking globally when they seek access to debt and equity capital, raw materials,

labour and customers. The growing globalization of business enterprises and international capital markets is creating much current interest in common, world-wide standards. In 1973, the International Accounting Standards Committee (IASC) was formed to develop International Accounting Standards (IASs) and to promote harmonization between accounting principles of different countries. The term harmonization refers to reducing or eliminating national differences in accounting principles. Accounting is not the same in all countries, and is strongly influenced by the economic, political and social environment of the country in which it exists. These social, political and environmental differences among countries are too many to expect complete harmonization of standards. Therefore individual countries were free to choose the degree to which IASs had to be followed within their jurisdiction. Economically developed countries (e.g. the USA and the UK) developed their own national accounting standards, so IASs had no direct authority in these countries. However several countries without their own domestic standard-setting bodies decided to adopt the IASs wholesale. Although differences exist among countries, the most basis aspects of accounting are consistent throughout the world. Double-entry systems, accrual accounting, and the income statement and balance sheet are used worldwide. Therefore similarities in financial reporting exceed the differences. The IASC grew in authority during the 1970s and 1980s, with more and more countries taking an interest in its activities. However two developments in the 1990s propelled the IASC to the forefront of international accounting:

The International Organisation of Securities Commissions (IOSCO) endorsement of IASs as the basis for preparing accounts o support cross-border listing. IOSCO is an influential organisation of the worlds stock market regulators, in which the US Securities and Exchange Commission (SEC) is a key member. In 1995 the IASC agreed with IOSCO that the IASC would develop a set of core standards. If IOSCO were satisfied with these standards, IOSCO would then endorse IASs as an acceptable basis of accounting for cross-border capital raising and listing purposes in all global markets (including the US). The IASC completed its core standards with the issue of IAS 39 in December 1998 and submitted them for endorsement by IOSCO. In May 2000 this endorsement was finally given. IOSCO has now recommended that its members (including the SEC) should permit multinational issuers to use IASs to prepare their financial statements for cross-border offerings and listings.

The European Union (EU) proposal to require all listed European companies to prepare their unconsolidated accounts in accordance with IASs, by 2005 at the latest. The European Commission (EC) continues to press for the whole of the EU to operate as one single economic unit. Following the introduction of the single internal market and the single currency (the euro), the EC is now seeking to adopt a single set of accounting standards. In 2000 the EC proposed that, by the year 2005, all EU listed companies should have to prepare their unconsolidated accounts in compliance with IASs. This should improve the efficiency of the capital market across the EU.

In 1999 the Board of the IASC approved a report Recommendations on Shaping IASC for the Future which recommended that a new structure for the IASC was required to reflect the IASCs increased importance. Therefore with effect from April 2001 the IASC has adopted a new constitution and a new structure. The structure of the organisation is depicted in the following diagram.

The structure is designed to support those features that are regarded as desirable in establishing the legitimacy of a standard-setting organisation: its members are technically expert, represent the wider community and are independent. The structure achieves its purpose by a balance of the functions of the various parts of the organisation, through the operational relationship shown in the diagram. The composition of the oversight body (the Trustees of the International Accounting Standards Committee Foundation), the advisory body (the Standards Advisory Council) and the interpretative body (the International Financial Reporting Interpretations Committee) represents the wider community by reflecting a diversity of geographical or professional backgrounds and membership of the standard-setting body (the International Accounting Standards Board) is based on the principles of technical competence and independence. The IASC Foundation is the supervisory body for the new structure. The 19 trustees of the Foundation are responsible for governance issues and ensuring that each body is properly funded. The IASB is an independent, privately-funded accounting standard setter based in London, UK. The Board is committed to developing, in the public interest, a single set of high quality understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. The IASB is solely responsible for issuing new International Accounting standards. The IASB has announced that, in future, its new standards will be called International Financial Reporting Standards (IFRSs), but the existing standards will continue to be called International Accounting Standards (IASs). Note that now the term IASC is used to refer to the whole structure of the new organisations in the above diagram, while the IASB is just the standard-setting body. The overall objective of the Board is to harmonize and improve accounting principles used in the preparation of financial statements, and to have them accepted world-wide so that financial statements may be internationally comparable and acceptable. Basically, the IASB is geared towards: Promoting the convergence of accounting standards around the world

Reducing the number of alternative accounting treatments around the world

The IFRIC issues rapid guidance on accounting matters where divergent interpretations of IASs have arisen. The SAC provides a forum for a range of experts from different countries and different business sectors to offer advise to the IASB when drawing up new standards. The procedure for the development of an IAS (to be called an IFRS in the future) is as follows: The IASB identifies a subject and appoints an Advisory Committee to advise on the issue The IASB publishes an Exposure Draft for public comment, being a draft version of the intended standard Following the consideration of comments received on the draft, the IASB publishes the final text of the standard.

Neither the IASC nor the accountancy profession has the power to enforce compliance with IASs. Nevertheless, as stated above, some countries adopt IASs as their local standards, and others ensure that there is minimum difference between their standards and IASs. In recent years, the status of the IASC and its standards have increased, so IASs carry considerable pervasive force throughout the world. 7. THE ROLE OF THE AUDITOR

To solve the problem of credibility, an auditor examines the information that managers use to prepare the financial statements and provides assurance about those statements. Upon seeing the auditors assurance that the financial statements provide a fair and accurate picture of a companys economic circumstances, investors can feel more comfortable about using the information to guide their investing activities. Therefore, an audit is an examination of transactions and financial statements made in accordance with generally accepted auditing standards.

The auditors duty (Jamaican Companies Act Section 156) The auditors are required to make a report (audit report) on the accounts examined by them and on every balance sheet, profit and loss account and on all group accounts laid before the company in a general meeting during tenure. The report shall contain statements as to the matters mentioned in the Tenth Schedule (Jamaican Companies Act) 8. USERS OF FINANCIAL STATEMENTS

Internal Users 1. 2. Management Employees

These need information to assist them in basic planning and control. External Users 1. 2. 3. 4. Debt holders debenture holders and other loan creditors Investors/Analysts Financial analysts, stock brokers, journalists, credit rating companies and economists Business interest groups Customers, suppliers, trade creditors and competitors Government tax authorities, regulatory bodies e.g. BOJ

5. 6.

Public political parties, environmental groups Other interest groups churches etc.

These represent those users who are outside the business enterprise who have or contemplate having a direct or an indirect interest in the enterprise.

The IASB Framework for the Preparation and Presentation of Financial Statements
As well as its accounting standards, the IASC Foundation has issued an important document setting out the objectives and concepts for use in developing standards of financial accounting and reporting that underlying the preparation and presentation of financial statements for external users the Framework for the Preparation and Presentation of Financial Statements (the framework). The purpose of the Framework is to: Provide broad definitions of the objectives, terms, and concepts involved in the practice of accounting Assist national standard-setting bodies in developing national standards Help users of financial statements to better understand the purpose, content, and characteristics of information contained in the financial statements. Assist the IASC Foundation in the development of future accounting standards and in its review of existing International Accounting Standards Assist the IASC Foundation by providing a basis for reducing the number of alternative accounting treatments permitted by International Accounting Standards The Framework is not an accounting standard. Nothing in the Framework overrides the specific International Accounting Standard. The first area addressed by the IASC Foundation was the basic purposes or objectives of financial reporting. The Foundation sought answers to the questions: Who are the users of accounting information? What kind of information do they require for decision making? Based on the objectives, the IASC Foundation proceeded to develop fundamental concepts that define the important qualitative characteristics of useful information and the specific elements to be included in financial statements. The following topics are covered in the Framework: 1. The objective of financial statements 2. Underlying assumptions 3. Qualitative characteristics of financial statements 4. The elements of financial statements 5. Recognition and measurement of the elements of financial statements 6. Concepts of capital and physical maintenance The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the stewardship of management. The financial statements should also include interpretations and explanations to help users understand the financial information provided. The economic decisions that are taken by users of financial statements require an evaluation of the ability of an enterprise to generate cash, and of the timing and certainty of its generation. Users are better able to evaluate this ability to generate cash if they are provided with information that focuses on its:

financial position (shown in the balance sheet) performance (shown in the income statement and statement of changes in equity) cash flow (shown in the cash flow statement)

Financial statements not only fulfil the stewardship function (i.e. reporting to owners the shareholders), but are also useful to other user groups such as: equity investors (existing and potential) lenders employees analysts/advisors (journalists, economists, trade unions, stockbrokers and credit rating agencies) business contacts (customers, suppliers, competitors and potential take-over bidders) government (tax authorities) the public To provide information that is useful, accountants begin by making certain assumptions, as such the Framework identifies the underlying assumptions governing financial statements the accruals basis and going concern. Given that the basic objective of external financial reporting is to provide information that is useful to people making rational economic decisions, a logical question is: What qualitative characteristics determine the usefulness of accounting information? Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. The four principal qualitative characteristics are understandability, relevance, reliability and comparability. The primary qualitative characteristics relating to content are relevance and reliability. The primary qualitative characteristics relating to presentation are comparability and understandability. Threshold quality A threshold quality is one that needs to be considered before considering the other qualities of that information. If any information does not pass the test of the threshold quality, it does not need to be considered further. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic that information must have if it is to be useful. The IASC believes that relevance and reliability are the two most fundamental qualitative characteristics that make financial information useful. Relevance: To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations. The major characteristics of relevant information are the following:

Predictive value information has predictive value when it can help users to increase the likelihood of correctly forecasting the outcome of events. Confirmatory/Feedback value information with feedback value enables users to confirm or correct expectations.

Reliability: To be useful, information must be reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. Reliable information has the following major characteristics:


Completeness To be reliable, the information in financial statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance. Prudence Prudence is the inclusion of a degree of caution in the exercise of judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. Neutrality relates to information being communicated in an unbiased manner. If financial statements are to satisfy a wide variety of users, the information presented should not be biased in favor of one group of users to the detriment of others. Representational faithfulness information is representationally faithful when there is agreement between the information being reported and the actual results of economic activity being measured. Substance over form If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form.

The primary characteristics that relate to presentation are comparability and understandability.

Comparability Users must be able to compare the financial statements of an enterprise over time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises in order to evaluate their relative financial position, performance and changes in financial position. Consistency is therefore required. In view of the number of reporting alternatives, the methods adopted by an enterprise should be consistently applied if there is to be continuity and comparability in the financial statements. Understandability An essential quality of information provided in financial statements is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.

What limits the application of the qualitative characteristics? Constraint of benefit and cost The balance between benefit and cost is a pervasive constraint rather than a qualitative characteristic. The benefits derived from information should exceed the cost of providing it. Timeliness If there is undue delay in the reporting of information it may lose its relevance. The elements of financial statements Having identified the qualitative characteristics of accounting information, the IASC established definitions for the five basic elements of financial statements of business enterprises: The elements directly related to the measurement of financial position in the balance sheet are assets, liabilities and equity.

An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Liabilities are an entitys obligations to transfer economic benefits as a result of past transactions or events. Equity interest is the residual amount found by deducting all liabilities of the entity from all of the entitys assets.


The elements directly related to the measurement of performance in the income statement are income and expenses.

Income is increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increase in equity, other than those relating to contributions from equity participants. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Recognition of the elements of financial statements Recognition is the process of reporting in the balance sheet or income statement an item that meets the definition of an element and satisfies the criteria for recognition. Items that satisfy the recognition criteria should be recognized in the balance sheet or income statement. Measurement of the elements of financial statements Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement. A number of different measurement bases are employed to different degrees and in varying combinations in financial statements. The Framework identifies four possible measurement bases:

Historical cost is the cash equivalent price exchanged for goods or services at the date of acquisition. Land, buildings, equipment, and most inventories are common examples of items recognized using the historical cost attribute. Current replacement cost is the cash or cash equivalents required to acquire them currently. Some inventories are recognized at their current replacement cost. Realizable value/Current Market Value is the cash or cash equivalents that could be obtained by selling an asset in an orderly liquidation. Investments in securities, short-term receivables, and some inventories often are reported using current market values. Present value is the present discounted value of the future net cash inflows or outflows. Long-term receivables and long-term payables use this measurement attribute.

Historical cost is the commonest basis, but others are often used to modify historical cost. Bibliography Financial Reporting, ACCA Study Text (International Stream), BPP Ltd., June 2002 December 2003

International Accounting Standards 2002, International Accounting Standards Board

Mendez, M., McLean, R.A., Regulatory Framework of Accounting in Jamaica, 3rd Edition, CFM Keiso, D.E., J.J., Warfield, T.D., Intermediate Accounting, 11th Edition, John Wiley & Sons, Inc.



1. 2.

What are the major bodies that constitute the regulatory accounting environment in Jamaica? What is the role of the IASC Foundation, International Accounting Standards Board (IASB), Standards Advisory Council (SAC), International Financial Reporting Interpretations Committee (IFRIC)? What is an audit? Outline the main elements of an annual report and describe the nature of each.
Using your own words, describe the basic elements of the IASB Framework. Define the five elements of financial statements What four measurement bases may be used in financial statements? Match the statements on the left with the letter of the terms on the right. An answer (letter) may be used more than once and some terms require more than one answer (letter). 1. Key ingredients in quality of relevance 2. Basic assumptions that influence the IASB framework 3. The idea that information should represent what it purports to represent 4. An important constraint, relating to costs and benefit 5. An example of conservatism 6. The availability of information when it is needed 7. Associating expense with a particular revenue or time period 8. Determines the threshold for recognition 9. Omission that can cause misleading information 10. An ingredient of faithful representation a. cost effectiveness b. Representational faithfulness c. Matching principle d. Feedback e. Time periods f. Unrealized g. Completeness h. Timeliness i. Materiality j. Predictive value k. Going concern l. Lower-of-cost-or-market-value m. Accrual accounting n. Substance over form

3. 4. 5.
6. 7. 8.


Determine whether the following statements are true or false. If a statement is false, explain why. a. Neutrality and predictive value are both characteristics of relevant information b. The tendency of recognizing favorable events early is an example of conservatism c. The objective of financial statements focus primarily on the needs of internal users of financial information d. The overriding objective of financial reporting is to provide information for making economic decisions e. Once an accounting method is adopted, it should never be changed.


According to the IASB Framework, predictive value is an ingredient of: a. b. Relevance No Yes Reliability No Yes


c. d. 11.

No Yes

Yes No

According to the IASB Framework, the process of reporting an item in the financial statements of an entity is: a. c. Recognition Realization b. d. Allocation Matching


According to the IASB Framework, which of the following is an essential characteristic of an asset? a. b. c. d. The claims to an assets benefits are legally enforceable An asset is tangible An asset is obtained at a cost An asset provides future benefits


According to the IASB Framework, which of the following relates to both relevance and reliability? a. b. c. d. Comparability Feedback value Materiality Timeliness


What is the IASB Framework intended to establish? a. b. c. d. Generally accepted accounting principles in financial reporting by business enterprises. The meaning of Present fairly in accordance with GAAP The objectives and concepts for use in developing standards of financial accounting and reporting The hierarchy of sources of GAAP.


According to the IASB Framework, neutrality is an ingredient of: a. b. c. d. Reliability Yes Yes No No Relevance Yes No Yes No


According to the IASB Framework, the objectives of financial reporting for business enterprises are based on: a. b. c. d. Generally accepted accounting principles Reporting on managements stewardship The need for conservatism The needs of the users of the information


According to the IASB Framework, the usefulness of providing information in financial statements is subject to the constraint of: a. b. c. d. Consistency Cost-benefit Reliability Representational faithfulness



According to the IASB Framework, which of the following attributes would not be used to measure inventory? a. b. c. d. Historical cost Replacement cost Net Realizable value Present value of future cash flows


Using the definition of an asset from IASB Framework, indicate whether each of the following should be listed as an asset by Devon Company. a) Devon has legal title to a silver mine in a remote location. Historically the mine has yielded over $100 million in silver. Engineering estimates suggest that no further minerals are economically extractable from the mine. Devon is currently negotiating the purchase of an oil field with proven oil reserves totaling 2 billion barrels.


c) d)

Devon employs a team of five geologists who are widely recognized as world-wide leaders in their fields. Devon claims ownership of a large piece of real estate in a foreign country. The real estate has a current market value of over $650 million. The country expropriated the land 35 years ago, and no representative of Devon has been allowed on the property since. Several years ago, Devon purchased a large meteor crater on the advice of a geologist who had developed a theory claiming that vast deposits of iron ore lay underneath the crater. The crater has no other economic use. No ore has been found, and the geologists theory is not generally accepted.



Using the definition of a liability from IASB Framework, indicate whether each of the following should be listed as a liability by Pauli Company.

a) b)

Pauli was involved in a highly publicized lawsuit last year. Pauli lost and was ordered to pay damages of $125 million. The payment has been made. In exchange for television advertising services that Pauli received last month, Pauli is obligated to provide the television station with building maintenance service for the next 4 months. Pauli contractually guarantees to replace any of its stain-resistant carpets if they are stained and cant be cleaned. Pauli estimates that its total payroll for the coming year will exceed $35 million.

c) d)



In the past, Pauli, has suffered frequent vandalism at its storage warehouses. Pauli estimates that losses due to vandalism during the coming year will total $3 million.