Chat with AIExam 2: The Conceptual Framework of Accounting and Its Relevance to Financial Reporting
The Australian Accounting Standards Board (AASB)retained the use of its own conceptual framework even after harmonisation.
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Bowen Pty Ltd is a small proprietary company with seven directors.Four of the seven directors own 75% of the ordinary shares and the remaining shares are owned by family members of the directors.The company also has 15 trade creditors and an open line of credit with one state bank.Is Bowen Pty Ltd a reporting entity and hence required to prepare general purpose financial reports?
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What qualities should financial information possess to be faithfully represented?
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Answered by Examlex AI CopilotFinancial information should possess several key qualities to be considered faithfully represented. Faithful representation is one of the fundamental qualitative characteristics that financial information must have to be useful to users, as outlined by the conceptual frameworks of accounting standards such as the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). The following are the main qualities that financial information should have to achieve faithful representation:
1. **Completeness**: Financial information should be complete within the bounds of materiality and cost. All necessary information required to understand a financial event or condition should be included. Omitting relevant information can lead to a misrepresentation of financial position or performance.
2. **Neutrality**: The information must be unbiased and free from any influence that might sway the presentation of financial data. It should not be colored by the preparer's intentions or desires. Neutrality ensures that the information reflects the substance of the economic events it represents, rather than being tailored to induce certain perceptions or behaviors.
3. **Free from Error**: While absolute accuracy is often not possible, financial information should be free from material error and not misleading. This means that the process of gathering, processing, and presenting the information should be done with accuracy in mind, and any known errors should be corrected.
4. **Representational Faithfulness**: The information presented in the financial statements should correspond to the economic phenomena it purports to represent. This means that the transactions and other events that have occurred should be depicted in a manner that is true to their substance and economic reality, rather than merely their legal form.
These qualities ensure that the financial information provided to users—such as investors, creditors, and regulators—is reliable and can be depended upon for decision-making purposes. When financial information is faithfully represented, it enhances the credibility of the financial statements and contributes to the overall transparency and trustworthiness of the financial reporting process.
When preparing financial reports 'users are assumed to have a reasonable knowledge of the business and economic activities and accounting and a willingness to study the information with reasonable diligence'.This statement is consistent with the qualitative characteristic of:
(46) The Framework defines principles for a specific accounting recognition,measurement and disclosure matter.
(37) The recognition criteria for liabilities are consistent with those for assets.
(31) Identify the appropriate qualitative characteristic employed in the following information:
(27) Which of the following statement(s)is/are true of the qualitative characteristic 'comparability'?
(35) The IASB Conceptual Framework for Financial Reporting (as released in 2010),requires that general purpose financial reports disclose information that is:
(43) In accordance with IASB Conceptual Framework which of the following is consistent with the definition of expenses?
(36) Ms Maple is an accounting cadet for one of the big accounting firms.She is a bit confused as to which of the following sources should be referred to first in dealing with an accounting issue.
(34) The AASB Framework serves as a guide to the Australian Accounting Standards Board (AASB)in developing accounting standards.
(41) Which of the following statement(s)is/are true of general purpose financial reports?
(32) Which of the following accounting policies is an example of costs versus benefits constraint being exercised in the disclosure of financial information?
(42) Which of the following transactions does not meet the definition of an asset?
(42) Prudence is exercised in the preparation and presentation of financial statements when asset values are never shown in excess of their realisable values but could be understated,and liabilities are never to be understated.
(28) Transactions or events that cannot be linked to a 'cost' or a 'market price' are not recognised.
(33) The IASB and US FASB are jointly developing a common conceptual framework to guide both standard setters in developing separate standards for their constituents.
(32) Mr and Mrs K Urban are partners in Urban Ltd,a music shop with sales revenue of $5 000 000 per annum,total assets of $10 000 000 and employees totalling 15.Urban Ltd is:
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