Regulatory Framework of Accounting
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Questions and Answers

What must be established for re-measurement to be recognized?

  • Only historical costs can be used as the basis.
  • There must be sufficient evidence of a change in monetary value. (correct)
  • A new accounting policy must be adopted.
  • The asset must be revalued every year.

    • Which aspect should financial performance information focus on?

  • Future projections of cash flows.
  • The characteristics and components of the performance. (correct)
  • The overall profitability of the company.
  • Comparative performance against competitors.

    • What is required in the presentation of cash flow statements?

  • Cash flows from all activities should be combined.
  • Cash flows should be presented based on the source of funds.
  • All cash flows must be reported on an annual basis.
  • Operating activities must be distinguished from non-operating activities. (correct)

    • What does FRS 18 ensure regarding accounting policies?

    <p>Most appropriate policies are adopted for circumstances.</p> Signup and view all the answers

    Which of the following statements about changes in accounting policy is true?

    <p>Material items must be recognized in financial statements.</p> Signup and view all the answers

    How should a change in accounting policy be treated in financial statements?

    <p>The effects should be reflected in the financial statements.</p> Signup and view all the answers

    What two concepts does FRS 18 recognize for their impact on financial statements?

    <p>Accruals and going concern.</p> Signup and view all the answers

    What is necessary for sufficient disclosure of accounting policies in financial statements?

    <p>Users must understand these policies and how they are applied.</p> Signup and view all the answers

    What distinguishes a change in estimate from a change in accounting policy?

    <p>A change in estimate is reflected in the income statement.</p> Signup and view all the answers

    What is the primary objective of an accounting regulatory framework?

    <p>To ensure adequate disclosure, objectivity, and comparability of accounting information</p> Signup and view all the answers

    Which entity is primarily responsible for ensuring greater harmony in the presentation of financial statements among member states?

    <p>The European Union (EU)</p> Signup and view all the answers

    What role does the Financial Reporting Committee (FRC) serve in accounting?

    <p>To issue accounting standards and reduce subjectivity in financial statements</p> Signup and view all the answers

    Which legislative framework mandates that limited liability companies present their accounts for public inspection?

    <p>The Companies Act</p> Signup and view all the answers

    What is the primary objective of financial statements according to the Statement of Principles for Financial Reporting?

    <p>To offer insights into the financial performance and position useful for decision-making</p> Signup and view all the answers

    What was the purpose of establishing the Accounting Standards Committee (ASC) in 1971?

    <p>To reduce subjectivity and variety in accounting practices through standardized statements</p> Signup and view all the answers

    Which of the following are considered qualitative characteristics of financial information?

    <p>Comparability and understandability</p> Signup and view all the answers

    Which of the following is a key requirement for publicly traded companies listed on the stock exchange?

    <p>To comply with stock exchange listing requirements</p> Signup and view all the answers

    What is a significant effect of stricter regulations in financial reporting?

    <p>It improves the quality and reliability of disclosed financial information</p> Signup and view all the answers

    What measurement basis refers to the original cost at which an asset was acquired?

    <p>Historic cost</p> Signup and view all the answers

    For what reason should an entity prepare and publish financial statements?

    <p>Because there is a legitimate demand for that information</p> Signup and view all the answers

    Which organization is NOT mentioned as influencing accounting practices and standards?

    <p>Institute of Internal Auditors (IIA)</p> Signup and view all the answers

    The term 'limited liability companies (LLC)' refers to which type of business entities?

    <p>Businesses that are required to submit financial reports for public inspection</p> Signup and view all the answers

    Which characteristic of financial information is concerned with its usefulness for decision-making?

    <p>Relevance</p> Signup and view all the answers

    Which of the following is NOT a purpose of accounting standards?

    <p>To promote various methods of accounting as alternatives</p> Signup and view all the answers

    Which of the following elements is NOT considered part of financial statements?

    <p>Future potential revenue</p> Signup and view all the answers

    What must occur for a transaction to be recognized in financial statements?

    <p>It creates or increases assets or liabilities</p> Signup and view all the answers

    Which of the following statements is true regarding the reporting entity concept?

    <p>An entity should publish statements if it is a cohesive economic unit</p> Signup and view all the answers

    What is the focus of the qualitative characteristic known as reliability?

    <p>The assurance that information reflects the substance of transactions</p> Signup and view all the answers

    In financial reporting, what term describes the total claims against the assets of an entity?

    <p>Liabilities</p> Signup and view all the answers

    What is the primary objective of financial statements according to the Companies Act?

    <p>To give a 'true and fair view'</p> Signup and view all the answers

    Which board was established to harmonize accounting standards worldwide?

    <p>The International Accounting Standards Board</p> Signup and view all the answers

    What concept underpins the requirement for businesses to prepare financial statements?

    <p>The business entity concept</p> Signup and view all the answers

    Which of the following statements is true regarding the Financial Reporting Standards for Smaller Entities?

    <p>It was issued in November 1997 for smaller businesses.</p> Signup and view all the answers

    According to the accounting standards, what does the term 'going concern' refer to?

    <p>The assumption that a business will continue to operate for the foreseeable future.</p> Signup and view all the answers

    Which fundamental accounting concept emphasizes the importance of recognizing and measuring financial information consistently over time?

    <p>Consistency concept</p> Signup and view all the answers

    What are International Financial Reporting Standards (IFRS) required for since 2005?

    <p>All listed companies</p> Signup and view all the answers

    What did the ASB establish in December 1999 that serves as an accounting framework?

    <p>Statement of Principles</p> Signup and view all the answers

    Which accounting concept requires that financial statements reflect reasonable verifiable estimates and cautiousness?

    <p>Prudence concept</p> Signup and view all the answers

    Which organization replaced the ASC in 1990 and is responsible for issuing the Financial Reporting Standards (FRS)?

    <p>Accounting Standards Board</p> Signup and view all the answers

    The level of regulation in financial reporting solely affects sole proprietorships.

    <p>False</p> Signup and view all the answers

    The International Accounting Standards Board (IASB) is responsible for issuing accounting standards.

    <p>True</p> Signup and view all the answers

    The Accounting Standards Committee (ASC) issued a total of 30 Statements of Standard Accounting Practices.

    <p>False</p> Signup and view all the answers

    The primary goal of the regulatory framework of accounting is to enhance subjective interpretation of accounting information.

    <p>False</p> Signup and view all the answers

    Accounting standards were established to increase the variety in accounting practices.

    <p>False</p> Signup and view all the answers

    Listed companies must adhere to stock exchange listing requirements when preparing financial statements.

    <p>True</p> Signup and view all the answers

    The Companies Act requires corporations to submit their financial accounts for public inspection.

    <p>True</p> Signup and view all the answers

    The Financial Reporting Committee (FRC) is part of the government regulatory framework.

    <p>False</p> Signup and view all the answers

    Regulation of business practices in accounting emerged as a response to financial statement misuse in the early 21st century.

    <p>False</p> Signup and view all the answers

    The European Union (EU) does not influence accounting practices among its member states.

    <p>False</p> Signup and view all the answers

    The International Accounting Standards Board was established to create a uniform accounting framework only for the United States.

    <p>False</p> Signup and view all the answers

    All private companies in the UK were required to comply with International Financial Reporting Standards starting in 2005.

    <p>False</p> Signup and view all the answers

    The Financial Reporting Standards issued by the ASB are specific to large corporations only.

    <p>False</p> Signup and view all the answers

    The Statement of Principles, published by the ASB, is classified as an official accounting standard.

    <p>False</p> Signup and view all the answers

    In accounting, the concept of 'substance over legal form' ensures that the legal structure of transactions takes precedence over their economic reality.

    <p>False</p> Signup and view all the answers

    The Companies Act mandates that financial statements must provide a 'true and fair view' for financial reporting.

    <p>True</p> Signup and view all the answers

    The Accounting Standards Board (ASB) is responsible for enforcing International Financial Reporting Standards in all jurisdictions.

    <p>False</p> Signup and view all the answers

    The concept of 'going concern' assumes that a business will continue to operate indefinitely.

    <p>True</p> Signup and view all the answers

    The four qualitative characteristics of financial information include Relevance, Reliability, Comparability, and Understandability.

    <p>True</p> Signup and view all the answers

    Only listed companies are obligated to comply with the International Financial Reporting Standards (IFRS).

    <p>False</p> Signup and view all the answers

    The four fundamental accounting concepts identified by SSAP published in 1971 include revenue recognition and accruals.

    <p>False</p> Signup and view all the answers

    Ownerships interests is considered one of the key elements of financial statements.

    <p>False</p> Signup and view all the answers

    Historic cost measurement reflects the market value of an asset at the time it is acquired.

    <p>False</p> Signup and view all the answers

    Financial statements are required to be prepared only if there is public demand for that information.

    <p>False</p> Signup and view all the answers

    The Statement of Principles for Financial Reporting was issued in 1998.

    <p>False</p> Signup and view all the answers

    Understanding the qualitative characteristics of financial information is essential for decision-making purposes.

    <p>True</p> Signup and view all the answers

    There are a total of 10 chapters in the Statement of Principles for Financial Reporting.

    <p>False</p> Signup and view all the answers

    An entity has to prepare and publish financial statements if it operates as a cohesive economic unit.

    <p>True</p> Signup and view all the answers

    Recognition in financial statements focuses exclusively on the profitability of an entity.

    <p>False</p> Signup and view all the answers

    The reliability of financial information measures whether it accurately reflects the substance of economic transactions.

    <p>True</p> Signup and view all the answers

    Re-measurement can be recognized without sufficient evidence that the monetary value of the asset has changed.

    <p>False</p> Signup and view all the answers

    The presentation of financial statements should only focus on the historic cost of assets and liabilities.

    <p>False</p> Signup and view all the answers

    FRS 18 ensures that accounting policies are selected with the least appropriate methods for an entity's circumstances.

    <p>False</p> Signup and view all the answers

    Changes in accounting policy must be disclosed in the financial statements while changes in estimates do not require reporting.

    <p>True</p> Signup and view all the answers

    FRS 18 recognizes three concepts that influence the persuasive impact on financial statements.

    <p>False</p> Signup and view all the answers

    Sufficient information about accounting policies must be disclosed to enable users to disregard the implementation methods.

    <p>False</p> Signup and view all the answers

    Loan interest charged to the income statement is an example of a change in estimate.

    <p>False</p> Signup and view all the answers

    Financial performance information should focus on the overall income generated rather than its individual components.

    <p>False</p> Signup and view all the answers

    Measurement in the financial statements must enable users to understand the accounting policies adopted and how they are used.

    <p>True</p> Signup and view all the answers

    FRS 18 recommends selecting a measurement basis based on either historic or market value as per the materiality of the transaction.

    <p>True</p> Signup and view all the answers

    Study Notes

    Regulatory Framework of Accounting

    • Abuse of financial reporting led to stricter regulations.
    • Public companies are legally bound to present financial reports.
    • Objective of the regulatory framework is to provide objective, comparable, and relevant accounting information for external users.
    • Accounting Standards are established to minimize subjectivity in preparing financial statements.

    Accounting Standards and Entities

    • Accounting Policies are specific principles that a business applies when preparing and presenting financial statements.
    • Statement of Principles for Financial Reporting (1999) lays out the principles for preparing financial statements that give a true and fair view.
    • The Objectives of Financial Statements are to provide information about the financial performance and position of an enterprise to assess management stewardship and make economic decisions.
    • The Reporting Entity identifies two main entities: single entity and group.
    • Qualitative Characteristics of Financial Information include relevance, reliability, comparability, and understandability.
    • Elements of Financial Statements include assets, liabilities, owners' interests, gains, and losses.
    • Measurement involves selecting a basis (historic cost or current value) for each category of asset or liability.
    • FRS replaced the ASC.
    • International Financial Reporting Standards (IFRSs) replaced International Accounting Standards (IASs) to harmonize standards globally.

    Accounting Concepts and Their Role

    • Modern accounting relies on concepts that developed over time.
    • These concepts are broad assumptions forming the basis of financial accounting.
    • Dual aspect concept emphasizes every transaction affecting at least two accounts.
    • Going concern concept assumes a business will continue operating indefinitely.
    • Accruals concept recognizes revenue and expenses in the period they are earned or incurred, not when cash is received or paid.
    • Prudence concept calls for cautious estimation and recognizing losses immediately, but delaying gains.
    • The statement of principles (1999) is not an accounting standard but underpins all subsequent standards.

    Introduction

    • The need for stricter financial reporting regulations arose from the misuse of financial statements in the late 20th century.
    • Regulation ensures transparency and accountability for businesses, particularly limited liability companies (LLCs), who are legally obligated to file their accounts with authorities for public inspection.
    • Accounting regulatory frameworks aim to ensure that financial information presented is accurate, relevant, objective, and comparable for external users.

    Accounting Regulation

    • Accounting regulations are established through various bodies and institutions:
      • Government: Through legislation like the Companies Act.
      • European Union (EU): Issues directives to ensure consistent financial statement presentation.
      • Stock Exchanges (BISX): Set listing requirements for publicly traded companies.
      • Professional Accounting Bodies: Such as the Financial Reporting Committee (FRC), the International Accounting Standards Board (IASB), and the Financial Accounting Standards Board (FASB).

    Accounting Standards

    • Accounting standards were introduced to mitigate subjectivity in financial statement preparation.
    • Accounting Standards Committee (ASC): Established in 1971, the ASC aimed to reduce variations in accounting practices through issuing 25 Statements of Standard Accounting Practices.
    • Accounting Standards Board (ASB): Replaced the ASC in 1990 and issued Financial Reporting Standards (FRS) to promote uniformity.
    • Financial Reporting Standards for Smaller Entities: Introduced in 1997 to provide specific guidance for smaller businesses.

    International Financial Reporting Standards (IFRS)

    • The International Accounting Standards Board (IASB) was established to harmonize accounting standards globally.
    • IFRS replaced the earlier International Accounting Standards (IAS).
    • Since 2005, all listed companies are required to comply with IFRS, and since 2007, all private companies are required to comply.

    Accounting Concepts and Their Role

    • The foundation of modern accounting rests upon concepts and conventions that have evolved over time.
    • These concepts are underlying assumptions serving as the bedrock of financial accounting.
    • Key Accounting Concepts:
      • Business Entity Concept
      • Dual Aspect Concept
      • Money Measurement Concept
      • Realization Concept
      • Historic Cost Concept
      • Going Concern Concept
      • Accruals Concept
      • Prudence Concept
      • Consistency Concept
      • Materiality Concept
      • Substance over Legal Form Concept

    Statement of Principles for Financial Reporting

    • The Statement of Principles, issued in 1999, outlines the principles that underpin the preparation and presentation of financial statements, ensuring a true and fair view.
    • Key Elements of the Statement:
      • Objectives of Financial Statements: Providing information on financial performance and position for decision-making and evaluating management stewardship.
      • The Reporting Entity: Identifying reporting requirements for single entities and entities within a group.
      • Qualitative Characteristics of Financial Information:
        • Relevance
        • Reliability
        • Comparability
        • Understandability
      • Elements of Financial Statements:
        • Assets
        • Liabilities
        • Ownerships interests
        • Gains
        • Losses
      • Recognition in Financial Statements: Criteria for recognizing transactions affecting assets, liabilities, gains, and losses.
      • Measurement: Methods for valuing transactions, including using historic cost or current value.
      • Presentation of Financial Statements: Guidelines for presenting financial information on performance and the composition of assets and liabilities.
      • Accounting for Interests in Other Entities: Procedures for presenting interests held in other entities.

    FRS 18: Accounting Policies

    • FRS 18 addresses the selection, application, and disclosure of accounting policies.
    • It ensures that:
      • Entities adopt policies appropriate to their circumstances.
      • Policies are reviewed regularly to ensure continued applicability.
      • Financial statements provide sufficient information for users to understand the policies adopted and their implementation.

    FRS 18 Key Points

    • All material items must be recognized in the financial statements with a chosen measurement basis (historic or current value).
    • Changes in accounting policies require adjustments to financial statements, while changes in estimates or estimation techniques do not.
    • FRS 18 prioritizes the accruals and going concern concepts as crucial influences on financial statements.

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    Description

    This quiz explores the regulatory framework of accounting, including the principles and standards that govern financial reporting. Learn about the importance of accurate reports for public companies and the roles of accounting policies and objectives. Understand how regulations are designed to enhance the reliability and comparability of financial statements.

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