FA IV Tutorial 1

Question 3

The Conceptual Framework for Financial Reporting (the Conceptual Framework) identifies the underlying
assumptions in the preparation and presentation of financial statements for external users.

Required:

Briefly explain the purposes of conceptual framework.

The purpose of the Conceptual Framework is to:

(a) assist the MASB to develop MFRS Standards (Standards) that are based on consistent concepts;
(b) to assist preparers to develop consistent accounting policies when no Standards applies to a particular transaction or other
event, or when a Standard allows a choice of accounting policies; and
(c) assist all parties to understand and interpret the Standards.

Question 4

The Conceptual Framework for Financial Reporting sets out the concepts and principles that underlie the
preparation and presentation of financial statements for external users.

Required:

Briefly explain ANY FOUR (4) elements of financial statements as prescribed by the Conceptual Framework.

Assets:
A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the
potential to produce economic benefits.

Liabilities:
A present obligation of the entity to transfer an economic resource as a result of past events. For a liability to exist, three criteria
must all be satisfied.
- the entity has an obligation
- the obligation is to transfer an economic resource
- the obligation is a present obligation that exists as a result of past events

Equity:
The residual interest in the assets of the entity after deducting all its liabilities.

Income:
Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from
holders of equity claims.

Expenses:
Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders
of equity claims.
Question 5 [ACCA Dec 2004 Q5]

(a) Explain FOUR ways in which the use of historical cost accounting may cause users of financial statements to
be misled when prices are rising. [ INFLAITON ]

- Statement of financial position value of assets may become seriously below their current value.

- Depreciation is based on the original cost of non-current assets and thus understates the true value obtained by the
business from the use of the assets. The result is that the profit is overstated.

- Inventory is usually value at cost, using FIFO and WOC. If prices are rising, sales current terms are matched with cost of
sales in historical cost terms. Profit is again overstated.

- The combined effects of the above three factors mean that return on capital employed is overstated.

- Year on year comparison results is likely to be misleading as figures will show an automatic increase as price rise. When
in real terms sales and profits may haven risen far less, or even have fallen.

- Profit on sale is calculated by taking the difference between historical cost and sales proceeds. When prices are rising,
as they usually are, the ‘holding gain‘ arising while the goods were held in inventory is included as part of the profit,
ignoring the fact that it will cost more to replace the them.

(b) Briefly state THREE reasons why historical cost accounting remains in use in spite of its limitations.

- It is simple and cheap.

- Figures used are objective and verifiable.
- Lack of a sound and acceptable alternative.

Question 6 [ACCA June 2004 Q5]

Comparability is a characteristic which adds to the usefulness of financial statements.z

Required:

a. Explain what is meant by the term ‘comparability’ in financial statements, relating to two types of
comparison that users of financial statements may make. (4 marks)

Comparability means that users are able to draw conclusions about the performance or financial position of a business by
relating figures for a particular period to other relevant figures.

Possible types of comparison are:

- Comparison with figures for the same business for earlier periods.
- Comparison with figures for other businesses for the same periods.
- Comparison with budgets or forecasts and actual.

*MASB = Malaysia Accounting Standard Board 马来西亚会计准则委员会

(b) Explain two ways in which the MASB’s accounting standards aid the comparability of financial information. (4
marks)

- By requiring the disclosure of accounting policies and the effect of changes in them.
- By reducing or eliminating the number of possible alternative treatments for similar items available to businesses.
- By requiring businesses to treat similar items in the same way within each period and from one period to the next, unless a
change is required to comply with accounting standards or to ensure that more appropriate presentation of events or transactions
is provided.
Question 7 [21 AUGUST 2014, Q3 (A)]

The Conceptual Framework for Financial Reporting (The Conceptual Framework) sets out the concepts and principles
that underlie the preparation and presentation of financial statements for external users.

Briefly explain the following qualitative characteristic of financial information:

(a) Comparability;
Information about a reporting entity is more useful if it can be compared with a similar information about other entities and with
similar information about the same entity for another period or another date.

Comparability enables users to identify and understand similarities in, and differences among, items.

(b) Verifiability;

Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent.

Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a faithful representation.

(c) Timeliness.

Timeliness means that information is available to decision-makers in time to and influencing their decisions.

Question 8 [APRIL 2014, Q3 (A)]

The Conceptual Framework for Financial Reporting (The Conceptual Framework) sets out the concepts and principles
that underline the preparation and presentation of financial statements for external users.

(a) Briefly explain the recognition criteria for assets and liabilities. (6 marks)
Recognition of assets
An asset is recognised in the statement of financial position when it is probable that its future economic benefits will flow
to the entity and the asset has a cost or value that can be measured reliably.

Recognition of liability
An liability us recognised in the statement of financial position when it is probable that an outflow of resources embodying
economic benefits will settle the present obligation and the amount can be measured reliably.

(b) List the bases for measurement of assets and liabilities in the financial statements as stated in The
Conceptual Framework. (4 marks)

- Historical Cost
- Current Cost
- Realisable value
- Present value
Question 9

(a) Explain and give example of the effect on a set of published financial statements if the going concern
convention is held not to apply.

The going concern assumption is that an entity will continue in operational existence for the foreseeable future. This
means that the financial statements of an entity are prepared on the assumption that the entity will continue trading.

If this were not the case, various adjustments would have to be made to the accounts, such as provisions for losses;
revaluation of assets to their possible market value; all non-current assets and liabilities would be reclassified as current;
and so forth.

Unless it can be assumed that the business is a going concern, other accounting assumptions cannot apply.

For example, it is meaningless to speak of consistence from one accounting period to next when this is the final
accounting period.

(b) Explain in general terms what MASB Conceptual Framework is trying to achieve.

One of the ideas behind the Conceptual Framework is to avoid the firefighting approach, which has characterized the
development of accounting standards in the past, and instead develop and underlying philosophy as a basis for consistent
accounting principles so that each standard fits into the whole framework.

Research began from an analysis of the fundamental objectives of accounting and their relationship to the information
needs of accounts users. The Conceptual Framework has gone behind the requirements of existing accounting standard,
which define accounting treatments for particular assets, liabilities, income and expenditure, to define the nature of assets,
liabilities, income and expenditure.

Question 10

For each of the two items below, the company keeps its records on a cash basis.

The company’s accounting year ended 30 September each year.

(A) On 2 February 2020, the company paid insurance premium for its premises

amounted to RM60,000 for the year ended 31 January 2021. It was recorded

as follows:

No further entries were made with respect to the rental.

Required:

(a) Calculate the amount of insurance to be recognised in the financial statements.

Amount to be recognised as prepaid = RM60000 x 4/12 = RM20000

Amount to be recognised as expense = RM60000 x 8/12 = RM40000

(b) Show the journal entries that need to be made to convert the company’s
year ended 30 September 2020 accounts to an accrual basis and the closing of the insurance account.

General Journal

2020 RM RM
Feb 2 Dr Insurance 60,000
Cr Cash 60,000
( Insurance paid )

Sep 30 Dr Prepaid insurance 20,000

Cr Insurance 20,000
( Prepaid insurance for Oct 2020 to Jan 2021 )

Dr Statement of profit or loss 40,000

Cr Insurance 40,000
( Insurance expenses recognised in SPL )

(B) The company invests RM750,000 in a 6-months fixed deposit at a commercial

bank on 1 September 2020. Interest rate stated at 4% per annum. The

following entry was made on 1 September 2020:

No further entries were made in the company’s books in 2020 since no interest

was received in cash during that year.

Required:

(a) When the fixed deposit mature on 1 March 2021, how much should the company receive?

Amount to be received on 1 March 2021

= RM750,000 + (RM750,000 x 4% x ½ )
= RN750,000 + RM15,000
= RM765,000

(b) Show the journal entries to convert the cash basis accounts to an accrual basis and the closing of the interest
received account for the year ended 30 September 2020.

General Journal

2020 RM RM
Sep 30 Dr Interest receivable 2500
Cr Interest received 2500
( 750,000 x 4% x 1/12 for Sep 2020 only )

Dr Interest received 2500

Cr Statement profit ot loss 2500
( Interest income recognised in SPL )

Question 11
Hebat Enterprise’s financial year end is on 30 November.

On 2 November 2020, Hebat Enterprise paid the rental for its premises amounting to RM120,000 for the period from
1 November 2020 to 31 January 2021. The above transaction was recorded as follows:

No further entries were made pertaining to the above transaction for the year ended 30 November 2020.

Required:

(c) Prepare the relevant journal entries to show how the above transaction should be accounted for in the
financial statements for the year ended 30 November 2020.

General Journal

2020 RM RM
Nov 2 Dr Rent 120,000
Cr Bank 120,000
( Rent paid )

Nov 30 Dr Prepaid rent (120,000 x 2/3) 80,000

Cr Rent 80,000
( Year end adjustment )

Dr SPL (120,000 x 1/3) 40,000

Cr Rent 40,000
( Posting of rent account )

(d) Explain how the above rental paid should be presented in the financial statements of Hebat Enterprise for
the year ended 30 November 2020.

Rent paid on 2 November 2020 is expenses for three months ( November 2020, December 2020 and January 2021 )
ended 31 January 2021.

The amount paid for December 2020 and January 2021 amounted to RM80,000 are to be recognised as prepaid rent
under current asset in the statement of financial position as at 30 November 2020.

Amount to be recognised as expense in the statement of profit or loss = RM40000 that is incurred ( accrual concept ) for
the year ended 30 November 2020.