CIMA BA3 · Chapter 2
Accounting concepts and qualitative characteristics MCQs with Answers
8 multiple-choice questions on Accounting concepts and qualitative characteristics for CIMA BA3 Fundamentals of Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under the accruals basis of accounting, transactions are recognised:
- A) Only when cash is received or paid
- B) Only when an invoice has been settled in full
- C) In the periods in which they occur, even if the related cash is received or paid in a different period
- D) When the directors decide that recognition is prudent
Show answer & explanation
Answer: C) In the periods in which they occur, even if the related cash is received or paid in a different period
Accrual accounting records the effects of transactions and other events in the periods in which they occur, not when the cash is received or paid. This is why accruals, prepayments, receivables and payables are recognised at the period end.
Question 2
Financial statements are normally prepared on the assumption that the entity will continue in operation for the foreseeable future. Which concept is this?
- A) Going concern
- B) Accruals
- C) Consistency
- D) Business entity
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Answer: A) Going concern
This is the going concern assumption. If the entity intends or needs to liquidate or cease trading, the financial statements may have to be prepared on a different basis, such as a break-up basis, and that basis must be disclosed.
Question 3
According to the IASB Conceptual Framework, what are the two fundamental qualitative characteristics of useful financial information?
- A) Relevance and faithful representation
- B) Comparability and understandability
- C) Timeliness and verifiability
- D) Prudence and consistency
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Answer: A) Relevance and faithful representation
The two fundamental qualitative characteristics are relevance and faithful representation. Comparability, verifiability, timeliness and understandability are enhancing characteristics. Prudence supports neutrality, and consistency helps to achieve comparability, but neither is a fundamental characteristic.
Question 4
Which of the following is NOT an enhancing qualitative characteristic in the IASB Conceptual Framework?
- A) Comparability
- B) Timeliness
- C) Verifiability
- D) Relevance
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Answer: D) Relevance
The enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability. Relevance is one of the two fundamental qualitative characteristics, together with faithful representation.
Question 5
Under the IASB Conceptual Framework, when is information considered material?
- A) When omitting, misstating or obscuring it could reasonably be expected to influence the decisions of the primary users of the financial statements
- B) When its value exceeds 5% of profit before tax
- C) When the external auditor has requested that it be disclosed
- D) When it relates to a transaction with a value above a limit set in the IFRS Standards
Show answer & explanation
Answer: A) When omitting, misstating or obscuring it could reasonably be expected to influence the decisions of the primary users of the financial statements
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions made by the primary users. Materiality depends on the nature and size of the item in the context of the entity. The IFRS Standards set no fixed percentage or monetary limit; a percentage such as 5% is only a practical rule of thumb.
Question 6
The owner of a shop takes goods from inventory for her family's personal use. These are recorded as drawings rather than as a business expense. Which concept explains this treatment?
- A) Going concern concept
- B) Materiality concept
- C) Accruals concept
- D) Business entity concept
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Answer: D) Business entity concept
The business entity concept treats the business as separate from its owner. Goods taken for personal use are not a cost of earning business income, so they are recorded as drawings, which reduce the owner's capital.
Question 7
Which of the following is NOT one of the components of faithful representation described in the IASB Conceptual Framework?
- A) Complete
- B) Neutral
- C) Comparable
- D) Free from error
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Answer: C) Comparable
A perfectly faithful representation would be complete, neutral and free from error. Comparability is a separate enhancing qualitative characteristic, not a component of faithful representation.
Question 8
Which of the following items of expenditure should be treated as capital expenditure?
- A) Repainting the walls of the existing office
- B) Repairs to a broken machine
- C) The annual insurance premium on a delivery van
- D) Legal fees paid in connection with the purchase of a new office building
Show answer & explanation
Answer: D) Legal fees paid in connection with the purchase of a new office building
Capital expenditure is spent on acquiring or enhancing non-current assets. Legal fees directly attributable to buying a building are part of the asset's cost. Repainting, repairs and insurance maintain existing assets or are running costs, so they are revenue expenditure charged to profit or loss.