Financial Reporting Exam Questions and
Answers Graded A+
Conceptual Framework - Correct answer-An attempt to systematise accounting
standards across the world by setting out the purpose of financial reporting and
clarifying the characteristics that accounting information should have. It will not
eliminate the need for standards. It serves as the starting point for the development
of all future standards.
(IASB) International Accounting Standards Board - Correct answer-Independent,
non-profit, private standard setting body consisting of 16 full-time members -
accounting experts from around the world - with a variety of experience ranging
from setting accounting standards, to auditing, to educating.
(FASB) Financial Accounting Standards Board - Correct answer-The board
governed by the SEC (Securities & Exchange Commission), a federal US agency
that regulates investment.
(IFRS) International Financial Reporting Standards - Correct answer-The unified
principle-based accounting standards created by the IASB.
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,(GAAP) Generally Accepted Accounting Principles - Correct answer-The rules-
based reporting standards created by the FASB.
Purpose - Correct answer-Statements must provide financial information that
assists economic decision making (e.g. any decisions involving the provision of
resources to the entity). The standards board assumes that the majority of
stakeholders are concerned with the business' ability to generate cash and cash
equivalents.
Rationality - Correct answer-The assumption that users are rational economic
decision makers, who are only interested in financial information.
Accruals Basis - Correct answer-The assumption of a Balance Sheet focus instead
of Income Statement focus. Transactions are recognized when their effects occur
rather than when cash flow is generated. (e.g. Performance Obligations) This
decision ensures that statements are useful and relevant.
Going Concern - Correct answer-The assumption that an entity is not likely to go
into liquidation soon, therefore we report assets at costs and not market prices. This
means that errors are overlooked--we care about long term values not day to day
fluctuations in value.
Understandability - Correct answer-Principle 1/4:
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,Financial statements need to be understandable or they won't be of any use. Users
are expected to have a reasonable knowledge of accounting and should read with
care.
Relevance - Correct answer-Principle 2/4:
Judged in terms of decisions made by users. Arguably, most decisions involve
looking ahead rather than backward. The framework states that historical
information is often a valid basis for predictions.
Materiality - Correct answer-Part of the Relevance principle, this is a requirement
which says that if an item's misstatement or omission would affect the decisions of
financial statement users - either due to the amount involved (i.e. percent it makes
up of total data) or due to the importance of the event - it should be included in the
reports.
Reliability - Correct answer-Principle 3/4:
'True and Fair'; information is free from material error and bias.
Faithful Representation - Correct answer-Part of the Reliability principle, this is a
requirement which says that it is important that statements are represented
faithfully in order to maintain reliability.
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, Substance over Form - Correct answer-Part of the Reliability principle, this is a
requirement which says that a report should reflect the economic substance of the
transaction rather than the legal form (e.g. duck test).
Neutrality - Correct answer-Part of the Reliability principle, this is a requirement
which says that financial statements must be free from bias.
Prudence - Correct answer-Part of the Reliability principle, this is a requirement
which says that when there is doubt, the lowest figure should be chosen for assets
and the highest for liabilities and expenses. This conservative, cautious judgement-
making in accounting ensures that assets & income are not overstated and
liabilities and expenses are not understated.
Completeness - Correct answer-Part of the Reliability principle, this is a
requirement which says that figures should be complete but only to the extent that
they are consistent with materiality and cost.
Comparability - Correct answer-Principle 4/4:
Requires consistency of accounting policies from year to year and also clear
disclosure of the major policies in use.
Consistency - Correct answer-Part of the Consistency principle, this is a
requirement which says that the entity must apply the same accounting methods
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Answers Graded A+
Conceptual Framework - Correct answer-An attempt to systematise accounting
standards across the world by setting out the purpose of financial reporting and
clarifying the characteristics that accounting information should have. It will not
eliminate the need for standards. It serves as the starting point for the development
of all future standards.
(IASB) International Accounting Standards Board - Correct answer-Independent,
non-profit, private standard setting body consisting of 16 full-time members -
accounting experts from around the world - with a variety of experience ranging
from setting accounting standards, to auditing, to educating.
(FASB) Financial Accounting Standards Board - Correct answer-The board
governed by the SEC (Securities & Exchange Commission), a federal US agency
that regulates investment.
(IFRS) International Financial Reporting Standards - Correct answer-The unified
principle-based accounting standards created by the IASB.
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,(GAAP) Generally Accepted Accounting Principles - Correct answer-The rules-
based reporting standards created by the FASB.
Purpose - Correct answer-Statements must provide financial information that
assists economic decision making (e.g. any decisions involving the provision of
resources to the entity). The standards board assumes that the majority of
stakeholders are concerned with the business' ability to generate cash and cash
equivalents.
Rationality - Correct answer-The assumption that users are rational economic
decision makers, who are only interested in financial information.
Accruals Basis - Correct answer-The assumption of a Balance Sheet focus instead
of Income Statement focus. Transactions are recognized when their effects occur
rather than when cash flow is generated. (e.g. Performance Obligations) This
decision ensures that statements are useful and relevant.
Going Concern - Correct answer-The assumption that an entity is not likely to go
into liquidation soon, therefore we report assets at costs and not market prices. This
means that errors are overlooked--we care about long term values not day to day
fluctuations in value.
Understandability - Correct answer-Principle 1/4:
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,Financial statements need to be understandable or they won't be of any use. Users
are expected to have a reasonable knowledge of accounting and should read with
care.
Relevance - Correct answer-Principle 2/4:
Judged in terms of decisions made by users. Arguably, most decisions involve
looking ahead rather than backward. The framework states that historical
information is often a valid basis for predictions.
Materiality - Correct answer-Part of the Relevance principle, this is a requirement
which says that if an item's misstatement or omission would affect the decisions of
financial statement users - either due to the amount involved (i.e. percent it makes
up of total data) or due to the importance of the event - it should be included in the
reports.
Reliability - Correct answer-Principle 3/4:
'True and Fair'; information is free from material error and bias.
Faithful Representation - Correct answer-Part of the Reliability principle, this is a
requirement which says that it is important that statements are represented
faithfully in order to maintain reliability.
©COPYRIGHT 2025, ALL RIGHTS RESERVED 3
, Substance over Form - Correct answer-Part of the Reliability principle, this is a
requirement which says that a report should reflect the economic substance of the
transaction rather than the legal form (e.g. duck test).
Neutrality - Correct answer-Part of the Reliability principle, this is a requirement
which says that financial statements must be free from bias.
Prudence - Correct answer-Part of the Reliability principle, this is a requirement
which says that when there is doubt, the lowest figure should be chosen for assets
and the highest for liabilities and expenses. This conservative, cautious judgement-
making in accounting ensures that assets & income are not overstated and
liabilities and expenses are not understated.
Completeness - Correct answer-Part of the Reliability principle, this is a
requirement which says that figures should be complete but only to the extent that
they are consistent with materiality and cost.
Comparability - Correct answer-Principle 4/4:
Requires consistency of accounting policies from year to year and also clear
disclosure of the major policies in use.
Consistency - Correct answer-Part of the Consistency principle, this is a
requirement which says that the entity must apply the same accounting methods
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