ACCA FA · Chapter 2
The qualitative characteristics of financial information MCQs with Answers
10 multiple-choice questions on The qualitative characteristics of financial information for ACCA FA Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which TWO qualitative characteristics are identified as fundamental in the IASB Conceptual Framework?
- A) Relevance and verifiability
- B) Comparability and understandability
- C) Relevance and faithful representation
- D) Faithful representation and timeliness
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Answer: C) Relevance and faithful representation
The Conceptual Framework identifies two fundamental qualitative characteristics: relevance and faithful representation. Comparability, verifiability, timeliness and understandability are enhancing characteristics, which improve the usefulness of information that is already relevant and faithfully represented.
Question 2
Which of the following is an ENHANCING qualitative characteristic of useful financial information?
- A) Materiality
- B) Going concern
- C) Faithful representation
- D) Comparability
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Answer: D) Comparability
The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability. Faithful representation is a fundamental characteristic, materiality is an entity-specific aspect of relevance, and going concern is the underlying assumption of the Framework.
Question 3
Which of the following statements about materiality are correct? 1. Materiality is an entity-specific aspect of relevance. 2. The IASB specifies a single percentage threshold that all entities must use to judge materiality. 3. An item may be material because of its nature even if its amount is small.
- A) 1 and 3 only
- B) 1 and 2 only
- C) 2 and 3 only
- D) 1, 2 and 3
Show answer & explanation
Answer: A) 1 and 3 only
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of primary users, so materiality depends on each entity's circumstances (statement 1 is correct). The IASB deliberately does not set a uniform quantitative threshold (statement 2 is incorrect). Some items, such as related party transactions or directors' remuneration, can be material because of their nature regardless of size (statement 3 is correct).
Question 4
To be a perfectly faithful representation, financial information should have three characteristics. Which of the following is NOT one of them?
- A) Complete
- B) Neutral
- C) Free from error
- D) Verifiable
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Answer: D) Verifiable
The Conceptual Framework states that a faithful representation is complete, neutral and free from error. Verifiability is an enhancing qualitative characteristic: it helps assure users that information faithfully represents what it claims to, but it is not one of the three components of faithful representation itself.
Question 5
Financial statements are normally prepared on the assumption that the entity is a going concern. What does this mean?
- A) The entity will continue in operation for the foreseeable future
- B) The entity's assets are measured at their realisable values
- C) The entity will make a profit in the next financial year
- D) The entity has sufficient cash to pay all its liabilities immediately
Show answer & explanation
Answer: A) The entity will continue in operation for the foreseeable future
The going concern assumption is that the entity has neither the intention nor the need to liquidate or significantly curtail its operations, so it will continue in operation for the foreseeable future. This is why assets are normally carried at cost-based amounts rather than break-up values. It does not guarantee future profits or immediate liquidity.
Question 6
Which of the following best describes the principle of substance over form?
- A) Items are recognised only when the related cash has been received or paid
- B) Transactions are recorded only when legal title has passed
- C) Transactions are accounted for in accordance with their economic reality rather than merely their legal form
- D) Assets are recorded at the lower of cost and fair value
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Answer: C) Transactions are accounted for in accordance with their economic reality rather than merely their legal form
Faithful representation requires that the economic substance of a transaction is reported, even when it differs from its legal form. For example, an entity may control and benefit from an asset before legal title passes to it. Recording only on transfer of legal title or on receipt of cash would not reflect the economic reality.
Question 7
Under the accruals (accrual basis) concept, when are the effects of transactions recognised?
- A) Only when the related cash is received or paid
- B) In the period in which the invoice is paid
- C) Only at the end of the financial year when the bank statement is reconciled
- D) In the period in which they occur, even if the related cash is received or paid in a different period
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Answer: D) In the period in which they occur, even if the related cash is received or paid in a different period
Accrual accounting reports the effects of transactions and events in the periods in which those effects occur, regardless of when cash changes hands. This gives a better basis for assessing performance than cash accounting, and is why accruals and prepayments are recorded at the period end.
Question 8
How does the IASB Conceptual Framework define a liability?
- A) A present obligation of the entity to transfer an economic resource as a result of past events
- B) A possible obligation that may arise from future events
- C) Any amount owed to the owners of the entity
- D) An amount that the entity intends to pay in the future
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Answer: A) A present obligation of the entity to transfer an economic resource as a result of past events
A liability is a present obligation of the entity to transfer an economic resource as a result of past events. An intention to pay, or an obligation that depends on future events, does not meet the definition. Amounts invested by owners are equity, which is the residual interest in assets after deducting liabilities.
Question 9
Which of the following would meet the Conceptual Framework definition of an asset of a trading company?
- A) A good reputation built up internally over many years
- B) A highly skilled and loyal workforce
- C) An amount owed by a customer for goods already delivered
- D) An order received from a customer for goods to be delivered next year
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Answer: C) An amount owed by a customer for goods already delivered
An asset is a present economic resource controlled by the entity as a result of past events. A receivable for goods already delivered is a right to cash arising from a past event (the sale). An order for future delivery is not yet a past event giving a present right, a workforce is not controlled by the entity, and internally generated reputation cannot be reliably separated or measured.
Question 10
Which of the following is NOT income as defined in the Conceptual Framework?
- A) Revenue from the sale of goods
- B) Additional capital introduced by the owner of the business
- C) A gain on the disposal of a non-current asset
- D) Interest received on a bank deposit
Show answer & explanation
Answer: B) Additional capital introduced by the owner of the business
Income is an increase in assets, or decrease in liabilities, that results in an increase in equity other than contributions from holders of equity claims. Capital introduced by the owner increases equity but is a contribution from the owner, so it is excluded from income. Sales revenue, interest received and gains on disposal are all income.