Conceptual Framework of Accounting

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31 Questions

Which statement best describes the purpose of financial statements?

To provide information on the company's business to stakeholders

Why was there a need for a unique global system of accounting rules?

To facilitate the exchange of information among investors

What led to the need for an easier and faster way of gathering information?

The improvement in communication and transportation systems

Which approach to global financial information is theoretically the most effective?

Standardization

What is the aim of the journey started by the European Community and the IASB?

To determine a unique accounting language

Which country is attributed with the development of the accounting system we have today?

Italy

Which law in France emphasized the importance of financial statements as a source of protection for social creditor rights?

Ordonnance de commerce

Which country is one of the few that still possesses its own accounting principle?

United States

When was the Securities and Exchange Commission (SEC) established?

1934

What is the agency recognized as the agency for ruling the accounting principles in the US?

Financial Accounting Standard Board (FASB)

When was the process of harmonization between International Accounting Standards and the US GAAP initiated?

1973

Which organization evaluates the impact of new accounting principles and issues an opinion on their application?

EFRAG

Which entity prepares a draft of UE Rule based on the opinion of EFRAG?

European Commission

Which entity is responsible for approving the draft of UE Rule prepared by the European Commission?

Accounting Regulatory Committee (ARC)

Which model of adoption is followed by the European Union (EU)?

Endorsement

Which organization is responsible for issuing the International accounting principles?

IASB

What is the purpose of the Conceptual Framework document?

To inspire financial statements prepared according to IAS/IFRS

Which one of the following is a primary qualitative characteristic of financial information?

Relevance

Which basis of accounting requires the preparation of financial statements on the assumption that the company will continue to operate for at least 12 months?

Accrual basis

What is meant by a faithful representation of financial information?

It must accurately represent the substance of what it purports to represent

Which principle states that the same accounting principle should be applied consistently in different periods?

Consistency principle

Which prohibition states that even if there is one account in asset towards a client, and another in liabilities, one cannot directly record the net result, but both must be recorded?

Offsetting prohibition

What was the impact of legislative interventions on the harmonization process of accounting standards?

They had a poor impact

Which of the following conditions must a resource meet in order to be reported on the financial statements?

All of the above

What does the rise of an obligation represent?

The commitment to transfer economic resources to a third party

How is equity defined in the conceptual framework?

The residual value of assets after deduction of any liability

How are income and expenses defined in the framework?

Variations in assets and liabilities

According to the Conceptual Framework, which of the following is NOT considered an enhancing qualitative characteristic of financial statements?

Understandability

According to the Conceptual Framework, what is the definition of financial statements?

Financial statements give a true representation of the financial effects of transactions.

According to the Conceptual Framework, what is the definition of assets?

Assets are economic resources controlled by the entity as a result of operations ran in the past.

In the Conceptual Framework, what is the relationship between substance over form and faithful representation?

Substance over form is a redundant characteristic in relation to faithful representation.

Study Notes

Financial Reporting and Accounting

  • The primary purpose of financial statements is to provide stakeholders with relevant information for decision-making.
  • The need for a unique global system of accounting rules arose due to the increased globalization of businesses and the necessity for consistent financial reporting.

History of Accounting

  • The development of modern accounting systems is attributed to Italy.
  • In France, the "Code de Commerce" law emphasized the importance of financial statements as a source of protection for social creditor rights.
  • Germany is one of the few countries that still possesses its own accounting principles.

Regulatory Bodies and Standards

  • The Securities and Exchange Commission (SEC) was established in 1934.
  • The SEC is the agency responsible for ruling on accounting principles in the US.
  • The International Accounting Standards Board (IASB) is responsible for issuing international accounting principles.
  • The European Financial Reporting Advisory Group (EFRAG) evaluates the impact of new accounting principles and issues an opinion on their application.
  • The European Commission prepares a draft of the UE Rule based on EFRAG's opinion, which is then approved by the European Union (EU).
  • The EU follows the endorsement approach to adopting international accounting standards.

Conceptual Framework

  • The Conceptual Framework document outlines the underlying principles and concepts for financial reporting.
  • The primary qualitative characteristic of financial information is faithful representation.
  • The going concern basis of accounting assumes that the company will continue to operate for at least 12 months.
  • A faithful representation of financial information means that financial statements accurately reflect the economic phenomena they are intended to represent.
  • The consistency principle states that the same accounting principle should be applied consistently in different periods.
  • The prohibition of offsetting states that even if there is one account in assets towards a client, and another in liabilities, one cannot directly record the net result, but both must be recorded.
  • Legislative interventions have delayed the harmonization process of accounting standards.

Elements of Financial Statements

  • A resource meets the definition of an asset if it is expected to generate future economic benefits.
  • The rise of an obligation represents a liability.
  • Equity is defined as the residual interest in the assets of an entity after deducting its liabilities.
  • Income and expenses are defined as increases or decreases in equity, other than those resulting from transactions with owners.
  • Comparability is not considered an enhancing qualitative characteristic of financial statements.
  • Financial statements provide information about an entity's financial position, performance, and cash flows.
  • Assets are defined as resources controlled by the entity as a result of past events, from which future economic benefits are expected to flow.
  • Substance over form is a principle that requires financial statements to reflect the economic substance of a transaction, not just its legal form.

Test your knowledge on the Conceptual Framework of accounting and its evolution over the years. Explore the concept of substance over form and understand its significance in the field of accounting. Learn about the changes made in the 2010 and 2015 versions of the framework and how they impact the analysis of contracts.

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