ACCA FR · Chapter 1
The conceptual framework and IAS 8 MCQs with Answers
10 multiple-choice questions on The conceptual framework and IAS 8 for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to the IASB Conceptual Framework for Financial Reporting, which are the two fundamental qualitative characteristics of useful financial information?
- A) Comparability and understandability
- B) Relevance and faithful representation
- C) Relevance and reliability
- D) Faithful representation and verifiability
Show answer & explanation
Answer: B) Relevance and faithful representation
The Conceptual Framework identifies relevance and faithful representation as the fundamental qualitative characteristics. Comparability, verifiability, timeliness and understandability are enhancing characteristics. 'Reliability' was replaced by faithful representation and is no longer the term used.
Question 2
Under the IASB Conceptual Framework, how is an asset defined?
- A) A resource legally owned by the entity from which future cash inflows are certain
- B) A present economic resource controlled by the entity as a result of past events
- C) A present economic resource controlled by the entity that can be measured at historical cost
- D) Any item expected to generate revenue for the entity in a future period
Show answer & explanation
Answer: B) A present economic resource controlled by the entity as a result of past events
The Framework defines an asset as a present economic resource controlled by the entity as a result of past events, where an economic resource is a right that has the potential to produce economic benefits. Control, not legal ownership, is the key test, and certainty of inflows is not required. Measurability is a recognition consideration, not part of the definition.
Question 3
Which of the following is NOT one of the enhancing qualitative characteristics in the IASB Conceptual Framework?
- A) Timeliness
- B) Materiality
- C) Verifiability
- D) Understandability
Show answer & explanation
Answer: B) Materiality
The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability. Materiality is an entity-specific aspect of relevance: information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of primary users.
Question 4
The Conceptual Framework describes several measurement bases. Which of the following is NOT a current value measurement basis?
- A) Historical cost
- B) Fair value
- C) Value in use (or fulfilment value for liabilities)
- D) Current cost
Show answer & explanation
Answer: A) Historical cost
The Framework splits measurement bases into historical cost and current value. Current value bases are fair value, value in use for assets (fulfilment value for liabilities) and current cost. Historical cost reflects the price of the transaction that gave rise to the item and is not updated for changes in value.
Question 5
On 1 January Kestrel Co sold inventory with a carrying amount of $1.5 million to a bank for $2 million. Kestrel Co continues to store the goods and is obliged to buy them back on 31 December of the same year for $2.2 million. How should Kestrel Co account for this transaction in the year?
- A) Derecognise the inventory and recognise revenue of $2 million and a profit of $500,000
- B) Keep the inventory in the SFP, recognise a $2 million liability and charge $200,000 finance cost to profit or loss
- C) Derecognise the inventory, recognise revenue of $2 million and provide $200,000 for the repurchase
- D) Keep the inventory in the SFP and credit the $2 million received to equity
Show answer & explanation
Answer: B) Keep the inventory in the SFP, recognise a $2 million liability and charge $200,000 finance cost to profit or loss
Applying substance over form, Kestrel Co keeps the risks and rewards of the inventory and must repurchase it at a fixed price, so the transaction is a secured loan rather than a sale. The $2 million received is recorded as a liability. The $200,000 difference between the $2.2 million repurchase price and the $2 million received is finance cost, accrued over the year. The inventory stays at its carrying amount of $1.5 million.
Question 6
Which of the following is a change in accounting estimate rather than a change in accounting policy under IAS 8?
- A) Changing the inventory cost formula from FIFO to weighted average cost
- B) Changing from expensing to capitalising borrowing costs on qualifying assets in order to comply with IAS 23
- C) Changing the measurement of investment properties from the cost model to the fair value model
- D) Revising the estimated useful life of a fleet of delivery vehicles from 5 to 4 years
Show answer & explanation
Answer: D) Revising the estimated useful life of a fleet of delivery vehicles from 5 to 4 years
A useful life is an estimate based on the latest available information, so revising it is a change in accounting estimate and is applied prospectively. Changing a cost formula, changing to comply with a standard's requirement and changing the measurement model for investment property all change the basis of measurement, so they are changes in accounting policy.
Question 7
In preparing its financial statements for the year ended 31 December 20X5, Marlin Co discovered that closing inventory at 31 December 20X4 had been overstated by $40,000 because of a counting error. Reported profit for 20X4 was $500,000. Draft profit for 20X5, calculated using the incorrect opening inventory, is $620,000. Ignoring tax, what is the correct profit for the year ended 31 December 20X5?
- A) $580,000
- B) $660,000
- C) $620,000
- D) $460,000
Show answer & explanation
Answer: B) $660,000
The error overstated 20X4 closing inventory, which is also 20X5 opening inventory. Overstated opening inventory overstates 20X5 cost of sales, so draft 20X5 profit is understated by $40,000. Correct 20X5 profit = $620,000 + $40,000 = $660,000. Under IAS 8 the 20X4 comparative is restated to $500,000 - $40,000 = $460,000.
Question 8
Osprey Co bought a machine on 1 January 20X1 for $200,000. It was depreciated on a straight-line basis over 10 years with no residual value. On 1 January 20X4 the directors decided the machine's remaining useful life was only 5 years. What is the depreciation charge for the year ended 31 December 20X4?
- A) $28,000
- B) $20,000
- C) $40,000
- D) $25,000
Show answer & explanation
Answer: A) $28,000
A change in useful life is a change in accounting estimate and is applied prospectively. Carrying amount at 1 January 20X4 = $200,000 - ($20,000 x 3) = $140,000. This is spread over the remaining 5 years: $140,000 / 5 = $28,000. Prior years are not restated.
Question 9
According to the Conceptual Framework, what is the underlying assumption on which financial statements are normally prepared?
- A) Accruals
- B) Prudence
- C) Consistency
- D) Going concern
Show answer & explanation
Answer: D) Going concern
The Conceptual Framework identifies going concern as the underlying assumption: the entity is assumed to continue operating for the foreseeable future. If management intends, or is forced, to liquidate or stop trading, a different basis is used and must be disclosed. Accruals and prudence are discussed elsewhere in the Framework but are not the underlying assumption.
Question 10
Which statement correctly describes how prudence is treated in the IASB Conceptual Framework?
- A) Prudence requires assets and income to be understated so that users are protected from overstatement
- B) Prudence is the exercise of caution when making judgements under uncertainty, and it supports neutrality
- C) Prudence requires all possible losses to be recognised while gains are recognised only when realised in cash
- D) Prudence was removed from the Framework because it conflicts with faithful representation
Show answer & explanation
Answer: B) Prudence is the exercise of caution when making judgements under uncertainty, and it supports neutrality
The Framework reintroduced prudence as the exercise of caution when making judgements under conditions of uncertainty. It means assets and income are not overstated and liabilities and expenses are not understated. It does not allow deliberate understatement, because that would breach neutrality and faithful representation. Recognising losses but not gains is not a Framework requirement.