CIMA BA3 · Chapter 1
The accounting framework and the Conceptual Framework MCQs with Answers
10 multiple-choice questions on The accounting framework and the Conceptual Framework for CIMA BA3 Fundamentals of Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following best describes the main purpose of financial accounting, as distinct from management accounting?
- A) To record transactions and report the financial performance and position of an entity, mainly for external users
- B) To prepare budgets and forecasts to help managers plan future operations
- C) To calculate standard costs and analyse variances for internal control
- D) To provide detailed product costings to support pricing decisions
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Answer: A) To record transactions and report the financial performance and position of an entity, mainly for external users
Financial accounting records an entity's transactions and summarises them in financial statements that report its performance and position, mainly for external users such as investors and lenders. Budgets, standard costing, variance analysis and product costing are management accounting tools prepared for internal decision-making.
Question 2
According to the IASB Conceptual Framework for Financial Reporting, what is the objective of general purpose financial reporting?
- A) To provide tax authorities with the information needed to calculate the entity's tax liability
- B) To demonstrate that the directors have complied with company law in every respect
- C) To provide management with information needed to control day-to-day operations
- D) To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
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Answer: D) To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
The Conceptual Framework states that the objective of general purpose financial reporting is to provide information useful to existing and potential investors, lenders and other creditors when deciding whether to provide resources to the entity. Tax computation, legal compliance and internal control are not the stated objective, although other parties may find the information useful.
Question 3
Which group does the Conceptual Framework identify as the primary users of general purpose financial reports?
- A) Existing and potential investors, lenders and other creditors
- B) Employees and trade unions
- C) Government agencies and regulators
- D) Customers and the general public
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Answer: A) Existing and potential investors, lenders and other creditors
The primary users are existing and potential investors, lenders and other creditors, because they cannot require reporting entities to provide information directly to them. Employees, government, customers and the public may also use the reports but are not the primary users to whom they are directed.
Question 4
Under the IASB Conceptual Framework, an asset is defined as:
- A) A resource owned by the entity from which future profits are certain to arise
- B) Any item of property purchased by the entity which has a measurable cost
- C) A future economic benefit that the entity expects to obtain from planned transactions
- D) A present economic resource controlled by the entity as a result of past events
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Answer: D) A present economic resource controlled by the entity as a result of past events
The Conceptual 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 test, and certainty of benefits is not required. Planned future transactions do not create a present resource.
Question 5
Under the IASB Conceptual Framework, which of the following is the definition of a liability?
- A) A present obligation of the entity to transfer an economic resource as a result of past events
- B) An amount that the entity expects to pay at some time in the future
- C) A possible obligation that will be confirmed by uncertain future events
- D) A credit balance in the ledger arising from an expense that has been paid
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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 expected future payment without a present obligation is not a liability, and a possible obligation dependent on uncertain future events is a contingent liability rather than a recognised liability.
Question 6
Which of the following is NOT one of the elements of financial statements identified in the IASB Conceptual Framework?
- A) Equity
- B) Income
- C) Expenses
- D) Profit
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Answer: D) Profit
The elements are assets, liabilities, equity, income and expenses. Profit is not a separate element; it is the result of deducting expenses from income.
Question 7
Which body is responsible for developing and issuing IFRS Accounting Standards?
- A) The International Accounting Standards Board (IASB)
- B) The IFRS Advisory Council
- C) National stock exchanges
- D) The external auditors of each listed company
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Answer: A) The International Accounting Standards Board (IASB)
The IASB is the independent standard-setting body that develops and issues IFRS Accounting Standards. The Advisory Council only advises the IASB and the Trustees, stock exchanges may require IFRS for listing but do not write the standards, and auditors report on financial statements but do not set standards.
Question 8
A business is set up as a limited liability company rather than as a sole trader. Which of the following is a consequence of this?
- A) The owners are personally liable for all the debts of the business
- B) The company does not need to prepare financial statements
- C) Profits are taxed as the personal income of the shareholders
- D) The shareholders' liability for the company's debts is limited to the amount unpaid on their shares
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Answer: D) The shareholders' liability for the company's debts is limited to the amount unpaid on their shares
A limited liability company is a separate legal entity, so shareholders can lose no more than the amount they have paid, or agreed to pay, for their shares. Unlimited personal liability applies to a sole trader. Companies must prepare financial statements and are taxed on their own profits.
Question 9
Which of the following is a current value measurement basis described in the IASB Conceptual Framework?
- A) Fair value
- B) Historical cost
- C) Amortised cost
- D) Original transaction price
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Answer: A) Fair value
The Conceptual Framework describes two categories of measurement basis: historical cost and current value. Current value bases are fair value, value in use (for assets) or fulfilment value (for liabilities), and current cost. The Framework states that applying the historical cost basis to financial assets and financial liabilities can be done by measuring them at amortised cost, so amortised cost is a historical cost measure, as is the original transaction price; neither is updated to reflect conditions at the measurement date.
Question 10
Under the revised IASB Conceptual Framework, an item that meets the definition of an element is recognised in the financial statements when:
- A) It is probable that future economic benefits will flow and its cost can be measured reliably
- B) Its value exceeds a materiality threshold set by the IASB
- C) It has been approved by the entity's external auditors
- D) Recognising it provides users with relevant information and a faithful representation of the item
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Answer: D) Recognising it provides users with relevant information and a faithful representation of the item
The revised Conceptual Framework recognises an element when doing so gives users relevant information and a faithful representation. The 'probable flow of benefits and reliable measurement' test was the recognition criterion in the earlier framework and has been replaced. The IASB sets no monetary materiality threshold, and auditors do not approve individual items.