In: Accounting
QUESTION 1 (12 minutes)
Answer the following multiple-choice questions. Indicate your choice by selecting only one option from the four options given for each question answered.
(a) Which one of the following is not considered to be an enhancing qualitative characteristic to ensure the usefulness of information that is already relevant and faithfully represented in terms of The Conceptual Framework for Financial Reporting 2018?
1) Completeness;
2) Comparability;
3) Timeliness;
4) Understandability.
(b) Which one of the following is not an objective of financial statements to provide information of an entity that is useful to a wide range of users when making economic decisions as set out by IAS 1?
1) Statement of financial position;
2) Statement of financial performance;
3) Statement of cash flows;
4) Statement of budget forecasts.
(c) In accordance to IAS 2 the historical cost of inventories does not include:
1) Purchasing costs;
2) Selling expenses;
3) Conversion costs;
4) Other costs incurred in bringing inventories to their present location and condition.
(d) On 1 January 2020, Duma Ltd issued a bond with a nominal value of R500 000 and a coupon rate of 8% (annually in arrears) when the market rate was also 8%. The bond will be redeemed at a 10% premium above nominal value on 31 December 2022. Transaction costs paid by Duma Ltd amounted to R30 000. The effective interest rate is:
1) 8,00%
; 2) 10,99%;
3) 13,48%;
4) 10,43%.
(e) Moola Ltd sold goods to a customer for a total consideration of R181 500, payable 24 months after delivery. The customer obtained control of the products on delivery. The cash selling price of the goods amounted to R150 000 and represents the amount that the customer would pay upon delivery instead of over 24 months. Moola Ltd will recognize:
1) Revenue of R181 500 on delivery;
2) Revenue of R181 500 after 24 months;
3) Revenue of R150 000 on delivery and interest income of R31 500 over 24 months;
4) Revenue of R150 000 on delivery and interest income of R31 500 after 24 months.
Ans.A. The correct answer is 1. Completeness. As per the Conceptual Framework for Financial Reporting 2018, the two main qualitative characteristics of information are relevance and faithful representation. The enhancing qualitative characteristics are timeliness, understandability, verifiability and comparability.
Therefore, completeness is not considered to be one of the four enhancing qualitative characteristics.
Ans.B. The correct option is 4. Statement of budget forecasts. As per IAS 1, the objective of financial statements is to provide information about financial position, financial performance, cash flow statement, and changes in financial position of an enterprise.
Therefore, statement of budget forecasts is not an objective of financial statements as set out by IAS 1.
Ans.C. The correct option is 2. Selling expenses. As per IAS 2, inventory should be recorded at lower of cost or net realizable value. Cost includes purchase price, conversion costs and any other costs incurred to bring inventory to present location.
Therefore, correct option is 2. Selling expenses.
Ans.E. The correct option is option 3. It should recognize R150,000 on delivery for cash selling price and interest income of R31500 over 24 months. This is so because the interest is for the credit period of 24 months granted. So, it should be recognized over the 24 months, as per the matching of revenues and costs principle of accounting.