Question

QUESTION ONE 1.1 There are ten (10) accounts listed on the following table. Complete the table by identifying and recording the element to which each account will be allocated and state whether the account will be shown in the statement of financial position (SOFP), the statement of changes in equity (SOCE) or the statement of profit or loss and other comprehensive income (SOCI). You may use the abbreviated form of the relevant statement as shown in the example below: No Account element Component of financial statement. Example Bank Asset SOFP 1.1.1 Equipment ? ? 1.1.2 Electricity ? ? 1.1.3 Services rendered ? ? 1.1.4 Investment in shares ? ? 1.1.5 Dividends received ? ? 1.1.6 Trade receivable ? ? 1.1.7 Long term borrowings ? ? 1.1.8 Interest on borrowings ? ? 1.1.9 Drawings ? ? 1.1.10 Capital ? ? Required: Use the table above to formulate your solution. Consider each of the accounts listed on the table and allocate to an element and show in which of the components of the financial statements the account will be shown. 1.2 Provide the definition of a liability and briefly describe the three criteria for showing a liability in the financial statements. 1.3 Financial statements are prepared and presented under the assumption that the entity is going to continue into the foreseeable future. What is this assumption commonly known as and what is its significance? 1.4 Briefly describe the two fundamental qualitative characteristics as identified in the conceptual framework. Also list two qualities that enhance the two fundamental characteristics.

Answer 1

No Account Element Component of financial statement

1.1.1 Equipment     Asset SOFP

1.1.2 Electricity Expenses SOCI

1.2.3 Service rendered Income SOCI

1.2.4 Investment in Shares Asset SOFP

1.2.5 Dividend Received Income SOCI

1.2.6 Trade Receivable Asset SOFP

1.2.7 Long Term Borrowings Liability SOFP

1.2.8 Interest on Borrowings Expense SOCI

1.2.9 Drawaings Capital SOCE

1.2.10 Capital Capital    SOCE   

1.2 Liability means a present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty of responsibility that the entity has no practical ability to avoid .

Three criteria for showing liability in financial Statement:

a) Obligation is arised out of past event,

b) The outflow of economic resources (such as cash) from the entity is probable,

c) The cost / value of the obligation can be measured reliably.

1.3 Finacial statment are prepared and presentedunder the assumption that the entity is going to continue into the forseeable future this assumtion is called Going Concern.

Significance of going concern assumtion:

The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is assumed that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its operations.If management conclude that the entity has no alternative but to liquidate or curtail materially the scale of its operations, the going concern basis cannot be used and the financial statements must be prepared on a different basis.

1.4 For information to be useful it must both be relevant and provide a faithful representation of what it purports to represent. Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information.

a) Relevence: Information is relevant if it is capable of making a difference to the decisions made by users. financial information is capable of making a difference in decisions if it has predictive value or confirmatory value.

b) Faithful representation: Information must faithfully represent the substance of what it purports to represent.A faithful representation is, to the maximum extent possible, complete, neutral and free from error.A faithful representation is affected by level of measurement uncertainty.

Two qualities that enchance the two fundamental charecteristic are:

a) Timeliness

b) Understandability