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(1a) “The business entity concept requires that a business is to be treated as separate from its owner, able to enter into business transactions on its own and be treated as a ‘legal person’” Is this statement true or false? A True B False (1b) Which of the following statements are correct? (1) Materiality means that only items having a physical existence may be recognised as assets.

(2) The substance over form convention means that the legal form of a transaction must always be shown in financial statements even if this differs from the commercial effect. (3) The money measurement concept is that only items capable of being measured in monetary terms can be recognised in financial statements. (Woods, F., 2007, p.108 and 112) A 2 only B 1, 2 and 3 C 1 only D 3 only

(1c) What is the main purpose of a balance sheet? I II To report assets, liabilities at a particular date To report capital (owner ship equity) at a particular date

To report on valuation & information about business activities at a over a specific period of time. IV To report on the growth in value of business at a particular date (Thomas, A., 2006, p.90-91) A B C D (1d) What accounting concept / principle describe the following statement? “All business transactions shall be expressed in common money terms to facilitate comparison & evaluation purposes”. (Woods, F., 2007, p.108) A B C D Matching Materiality Monetary Substance over form I only I & II only III & IV only IV only

III

(1e) Which of the following statements explain the consistency concept? (Woods, F., 2007, p.109) A B C D $1,200 was taken up in accounting records as purchase of 100 units of merchandise at $12 per unit. Stocks that have been taken from business for own use by a sole proprietor is known as drawings. Depreciation rate of 15% per annum has been decided upon by the management to be applied on all company’s owned motor vehicles. Discount allowed & commission received will be taken up in the relevant financial statement in order to derive the profit or loss for the business.

(1f)

“The purchase of an air filtration & purifier equipment valued at $5,000. ABC Sdn Bhd treated it as an expense item where as for Perkongsian XYZ, it was taken up as business asset.” (Woods, F., 2007, p.112) The above brief statement explains the concept of ….. A B C D (2a) List 5 components of financial statements. Materiality Consistency Historical cost Monetary

(2b) State the main reason for preparing a balance sheet. (Thomas, A., 2006, p.90-91)

(3) Explain the following accounting terms: (i) Going concern concept; (ii) Historical Cost concept (iii) Accruals concept; (iv) Materiality (v) Prudence, in relation to the recognition of profits and losses. (Woods, F., 2007, p. 115) (4) Briefly explain the objectives of financial statements. (5) State & briefly explain four qualitative characteristics of financial

statements. (Thomas, A., 2006, p.111) (6) Identify & briefly explain the applicable accounting conventions / concepts for the following scenario: (a) A business entity has been in operation for the past 5 years & has been preparing its accounts for 12 months ending 31 December. One of the partners requested the latest accounts to be prepared for 18 months in order to “present a much impressive” accounts to for the review of its loan provider. (b) Confirmed / realized credit sales amounting to RM200K need not be taken up in books for the current accounting period as it does not involve cash receipt / payment. (7) The historical cost convention looks backwards but the going concern convention looks forwards. Which do you think a shareholder is likely to find more useful, a report on the past or an estimate of the future? Why? (Woods, F., 2007, p. 115) (1a) A (1b) D (1c) B (1d) C (1e) C (1f) (2a) Balance Sheet, Income Statement, Statement of Changes / Movement in (Owners) Equity, Cash Flow Statement & Accounting Policies & Explanatory Notes. (2b) A

A balance sheet provides a statement of the financial position of a business at a particular point in time. It reports the assets, liabilities & capital at a specific date, usually the end of an accounting period. (3a) (i) Going Concern Concept The going concern concept implies that the business will continue in operational existence for the foreseeable future, and that there is no intention to put the company into liquidation or make drastic cutbacks to the scale of operation. This concept has a major influence on the assumptions made when evaluating particular items in the balance sheet. For example assets are not normally shown at net realisable value because they are expected to be kept in the business for future use. (ii) Historical Cost Concept The assets are normally shown at cost price, and that is the basis for valuation of the asset. (iii) Accruals Concept The accruals concept requires that revenue and costs are recognised as they are earned or incurred, not when the money is received or paid. They must be matched with one another so far as their relationship can be established or justifiably assumed and dealt with in the income statement of the period to which they relate. (iv) Prudence Concept The accountant should always exercise caution when dealing with uncertainty while, at the same time, ensuring that the financial statements are neutral – that gains and losses are neither overstated nor understated. By applying the prudence concept, an accountant will normally make sure that all losses are recorded in the books, but that profits and gains will not be anticipated by recording them before they should be recorded. (3b)

Accruals or matching concept. Profit should be calculated by matching the costs which have been incurred in an accounting period (regardless of when payment is actually made) with the revenue earned in the same period. (4) - To provide information on financial position, performance & cash flows of an enterprise that is useful to a wide range of users in making economic decisions.

- Show the result of management’s stewardship of the resources entrusted to it.

(5) Understandability Users who has a reasonable grasp or knowledge of accounting and Business acumen and as well as willing & know how to study and analyze the information presented. Reliability This will be enhanced in the case of reports which are independently verified. E.g. having gone through external audit by qualified public accountant. Relevance Relevant information provides both feedback and predictive value. This helps users evaluate past and future performance. Relevant information must be made available on time. If information is only available after the decision is made, it isn’t of much use. Comparability

Comparability requires that similar events be accounted for in the same manner on the financial statements of different businesses and for a particular business, for different periods. Comparability of accounting data for the same business over time is called consistency. (6a) Consistency concept. The entity shall continue to prepare a 12 months ending accounts instead of a 18-month accounts. This ensures the similar pattern is maintained and equitable comparison can be made against the previous financial results. One does not change unless circumstances required, such as change of accounting year end, requirement by any accounting standards or legislation. (6b) Accrual concept As long as it is realized / sales been made, this concept requires that revenue or expense is to be recognized & recorded in books when it is earned or incurred, disregard when the proceed is received. 7) Shareholders want financial statements so that they can decide what to do with their shareholdings, whether they should sell the shares or hold on to them. To enable them to decide upon their actions, they would really like to know what is going to happen in the future. To help them in this, they also would like information which shows them what happened in the past. Ideally, therefore, they would like both types of report, those on the past and those on the future.


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