CS 1 FRA2016 TUTORIAL QUESTIONS
WITHSOLUTIONS V13 UPDATED 2022
TUTORIAL QUESTIONS(WITH SOLUTIONS)
FRA, 2016
Discipline of Accounting, UTS Business School
In-class questions for each week
In-class questions are marked thus: E15.17.
Note:
Reference styles are as follows:
D1-4 Whittred Zimmer Taylor and Wells, chapter 1, Discussion
question 1-4 CQ1: x,y,z Loftus et al chapter 1, Comprehension Question x, y,
and z
CS1.1 Loftus et al chapter 1, Case
Study 1 E1.1 Loftus et al chapter 1, Exercise 1
,1. Introduction – material for tutorial in Week 2
Preparation: Additional Questions AQ1-AQ4 (below)
Ch.1: (p.28) CQ1:
4,6,9,11,12; Ch.1: (p.30)
E1.5;
Ch.1: (p.29) CS1.1(d);
Ch.2: (p.49) CQ2: 6,7,8;
Ch.2: (p.52) E2.8
In-class discussion: Ch.1: (p.30) E1.4,
Ch.1: (p.31) E1.13;
Ch.2: (p.29) CS2.2
Additional
Questions AQ1) What are the three functions of
accounting?
AQ2) What are the agency costs of debt, as discussed in WZTW Chapter 1?
AQ3) What are the agency costs of equity, as discussed in WZTW Chapter 1?
AQ4) If income-increasing accounting techniques result in lower income in the
following year(s), why do management use them?
SOLUTION TO AQ1
AQ1 The three functions of accounting are decision-making, contracting and stewardship
SOLUTION TO AQ2
AQ2 The agency costs of debt are:
• Management will use the debt to increase dividend payments to shareholders
• Management will borrow additional funds, thus diluting the claim of the existing
debtholders
• Management will use the funds for a purpose other than that stated (asset substitution)
• Management will not invest in a positive NPV project as all (or most) of the
cashflows will flow to the debtholders (under investment)
SOLUTION TO AQ3
AQ3 The agency costs of equity are:
• Management will consume additional resources not required in the
performance of their employment (perquisite consumption)
• Management will not take on positive NPV (but risky) projects – as they are not
as diversified as shareholders (risk aversion)
• Management will not pay (or lower) dividends to shareholders (over retention)
• Management will take suboptimal decisions as their time horizons are
shorter than those of shareholders (horizon problems)
SOLUTION TO AQ4
AQ4 A major reason is because management have limited time horizons, and may not be at
the company when the income reversals begin to occur. Conversely, if it is likely that
they still will be at the company, they may believe that they can either generate
additional actual income next year (efficiency perspective), or simply use additional
income-increasing accounting techniques (opportunistic perspective).
SOLUTION TO CQ1.4
4. How does the IASB influence financial reporting in Australia?
,Australia has adopted International Financial Reporting Standards since 2005. Hence
technical issues on the IASB work program are also included on the AASB work program. The
AASB Board members and staff can identify issues requiring consideration. Some of these
issues can be referred to the IASB for consideration and some can be addressed
domestically. In fact the issue of an accounting standard by the IASB would result in a
corresponding and consistent standard being issued by the AASB. The text of the
international accounting
, standard may be modified to the extent necessary to take account of the Australian legal or
institutional environment and, in particular, to ensure that any disclosure and transparency
provisions in the standard are appropriate to the Australian legal or institutional
environment. This is often reflected in modifications to standards for application by not-for-
profit entities in Australia.
SOLUTION TO CQ1.6
6. What is the difference between Australian Accounting Standards and IFRSs?
While IFRSs are developed for application by profit-seeking entities, Australian Accounting
Standards are also applied by not-for-profit entities in the public and private sectors.
Accordingly Australian Accounting Standards may include additional or different
requirements or exemptions for not-for-profit entities. Australian Accounting Standards also
cover additional matters, such as disclosure requirements (typically in a separate standard)
on matters not covered by IFRSs. The difference introduced by the AASB can be easily
identified in the texts. For example, paragraphs added by the AASB are prefixed with “Aus”
while paragraphs deleted by the AASB are indicated as “deleted by the AASB”.
SOLUTION TO CQ1.9
9. Outline the fundamental qualitative characteristics of financial reporting information
to be included in general purpose financial statements.
The fundamental qualitative characteristics of financial information are relevance and faithful
representation.
Paragraphs QC6 to QC11 of the Conceptual Framework elaborate on the qualitative
characteristic of elevance. Information is relevant if:
• it is capable of making a difference in the decisions made by the capital providers as
users of financial information
• it has predictive value, confirmatory value or both. Predictive value occurs where the
information is useful as an input into the users’ decision models and affects their
expectations about the future. Confirmatory value arises where the information
provides feedback that confirms or changes past or present expectations based on
previous evaluations.
• it is capable of making a difference whether the users use it or not. It is not necessary
that the information has actually made a difference in the past or will make a
difference in the future.
Paragraphs QC12 to QC16 of the Conceptual Framework elaborate on the
fundamental qualitative characteristic of faithful representation. Information is
faithfully represented if:
complete. A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary
descriptions and explanations. (QC13)
neutral A neutral depiction is without bias in the selection or presentation of financial
information. (QC14)
free from error. Free from error means there are no errors or omissions in the
description of the phenomenon, and the process used to produce the reported
information has been selected and applied with no errors in the process. (QC15)
SOLUTION TO CQ1.11
11. Discuss the essential characteristics of an asset as described in the conceptual framework.
WITHSOLUTIONS V13 UPDATED 2022
TUTORIAL QUESTIONS(WITH SOLUTIONS)
FRA, 2016
Discipline of Accounting, UTS Business School
In-class questions for each week
In-class questions are marked thus: E15.17.
Note:
Reference styles are as follows:
D1-4 Whittred Zimmer Taylor and Wells, chapter 1, Discussion
question 1-4 CQ1: x,y,z Loftus et al chapter 1, Comprehension Question x, y,
and z
CS1.1 Loftus et al chapter 1, Case
Study 1 E1.1 Loftus et al chapter 1, Exercise 1
,1. Introduction – material for tutorial in Week 2
Preparation: Additional Questions AQ1-AQ4 (below)
Ch.1: (p.28) CQ1:
4,6,9,11,12; Ch.1: (p.30)
E1.5;
Ch.1: (p.29) CS1.1(d);
Ch.2: (p.49) CQ2: 6,7,8;
Ch.2: (p.52) E2.8
In-class discussion: Ch.1: (p.30) E1.4,
Ch.1: (p.31) E1.13;
Ch.2: (p.29) CS2.2
Additional
Questions AQ1) What are the three functions of
accounting?
AQ2) What are the agency costs of debt, as discussed in WZTW Chapter 1?
AQ3) What are the agency costs of equity, as discussed in WZTW Chapter 1?
AQ4) If income-increasing accounting techniques result in lower income in the
following year(s), why do management use them?
SOLUTION TO AQ1
AQ1 The three functions of accounting are decision-making, contracting and stewardship
SOLUTION TO AQ2
AQ2 The agency costs of debt are:
• Management will use the debt to increase dividend payments to shareholders
• Management will borrow additional funds, thus diluting the claim of the existing
debtholders
• Management will use the funds for a purpose other than that stated (asset substitution)
• Management will not invest in a positive NPV project as all (or most) of the
cashflows will flow to the debtholders (under investment)
SOLUTION TO AQ3
AQ3 The agency costs of equity are:
• Management will consume additional resources not required in the
performance of their employment (perquisite consumption)
• Management will not take on positive NPV (but risky) projects – as they are not
as diversified as shareholders (risk aversion)
• Management will not pay (or lower) dividends to shareholders (over retention)
• Management will take suboptimal decisions as their time horizons are
shorter than those of shareholders (horizon problems)
SOLUTION TO AQ4
AQ4 A major reason is because management have limited time horizons, and may not be at
the company when the income reversals begin to occur. Conversely, if it is likely that
they still will be at the company, they may believe that they can either generate
additional actual income next year (efficiency perspective), or simply use additional
income-increasing accounting techniques (opportunistic perspective).
SOLUTION TO CQ1.4
4. How does the IASB influence financial reporting in Australia?
,Australia has adopted International Financial Reporting Standards since 2005. Hence
technical issues on the IASB work program are also included on the AASB work program. The
AASB Board members and staff can identify issues requiring consideration. Some of these
issues can be referred to the IASB for consideration and some can be addressed
domestically. In fact the issue of an accounting standard by the IASB would result in a
corresponding and consistent standard being issued by the AASB. The text of the
international accounting
, standard may be modified to the extent necessary to take account of the Australian legal or
institutional environment and, in particular, to ensure that any disclosure and transparency
provisions in the standard are appropriate to the Australian legal or institutional
environment. This is often reflected in modifications to standards for application by not-for-
profit entities in Australia.
SOLUTION TO CQ1.6
6. What is the difference between Australian Accounting Standards and IFRSs?
While IFRSs are developed for application by profit-seeking entities, Australian Accounting
Standards are also applied by not-for-profit entities in the public and private sectors.
Accordingly Australian Accounting Standards may include additional or different
requirements or exemptions for not-for-profit entities. Australian Accounting Standards also
cover additional matters, such as disclosure requirements (typically in a separate standard)
on matters not covered by IFRSs. The difference introduced by the AASB can be easily
identified in the texts. For example, paragraphs added by the AASB are prefixed with “Aus”
while paragraphs deleted by the AASB are indicated as “deleted by the AASB”.
SOLUTION TO CQ1.9
9. Outline the fundamental qualitative characteristics of financial reporting information
to be included in general purpose financial statements.
The fundamental qualitative characteristics of financial information are relevance and faithful
representation.
Paragraphs QC6 to QC11 of the Conceptual Framework elaborate on the qualitative
characteristic of elevance. Information is relevant if:
• it is capable of making a difference in the decisions made by the capital providers as
users of financial information
• it has predictive value, confirmatory value or both. Predictive value occurs where the
information is useful as an input into the users’ decision models and affects their
expectations about the future. Confirmatory value arises where the information
provides feedback that confirms or changes past or present expectations based on
previous evaluations.
• it is capable of making a difference whether the users use it or not. It is not necessary
that the information has actually made a difference in the past or will make a
difference in the future.
Paragraphs QC12 to QC16 of the Conceptual Framework elaborate on the
fundamental qualitative characteristic of faithful representation. Information is
faithfully represented if:
complete. A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary
descriptions and explanations. (QC13)
neutral A neutral depiction is without bias in the selection or presentation of financial
information. (QC14)
free from error. Free from error means there are no errors or omissions in the
description of the phenomenon, and the process used to produce the reported
information has been selected and applied with no errors in the process. (QC15)
SOLUTION TO CQ1.11
11. Discuss the essential characteristics of an asset as described in the conceptual framework.
