Practice questions with answers: Financial Reporting Standards

1. Which of the following best describes the consistency concept?

A. Only material items are disclosed.
B. The way an item is presented remains the same at all times.
C. The presentation and classification of items should remain the same unless a change is required
by any financial reporting standard.

Answer: C
The presentation and classification of items should remain the same unless a change is required by the
relevant financial reporting standards. Materiality is а concept that refers to the relevance of useful
information.

2. Which of the following is NOT an underlying assumption of financial statements?

A. Accrual accounting
B. Faithful representation
C. Going concern

Answer: B
The two underlying assumptions of financial statements are accrual accounting and going concern.
Answer B is incorrect because faithful representation is a qualitative characteristic of useful financial
information.

3. Which of the following elements of financial statements does not apply the accrual concept of
accounting?
A. Revenue
B. Current assets
C. Cash outflows

Answer: C
The accrual accounting concept means that financial statements should reflect transactions at the time
they actually occur and not when cash is paid. Therefore, all financial statements, except for the Cash
Flow Statement, are prepared under the accrual assumption. Cash inflows and cash outflows are
recorded when they occur.

4. Which of the following does not describe faithfully represented information?

A. Understandable
B. Complete
C. Free from error

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Answer: A
The IASB Conceptual Framework states that Information that is faithfully represented is complete,
neutral, and free from error. As per the Conceptual Framework for Financial Reporting, the two
fundamental qualitative characteristics of useful information are relevance and faithful representation,
while the four enhancing qualitative characteristics are comparability, verifiability, timeliness, and
understandability. Therefore, the correct answer is A.

5. Which of the following pairs is incorrect:

A debit entry will: A credit entry will:
A. Increase an asset Decrease an asset
B. Decrease a liability Increase a liability
C. Increase an expense Increase income

A. A is incorrect
B. C is incorrect
C. All are correct

Answer: C
These are all correct statements.

6. Which of the following equations is incorrect?

A. Equity = Total Assets + Total Liabilities
B. Revenue = Net Income + Expenses
C. Retained Earnings (closing balance) = Retained Earnings (opening balance) + Net income for the
current period

Answer: A
The major accounting equation states that Equity = Assets – Liabilities. By definition, equity is the
owners’ residual interest in the company’s assets after deducting its liabilities. Therefore, A is incorrect.

Answer B is correct. If we rearrange it, we get a more common version of it:

Net Income = Revenue – Expenses. This is the major Income Statement equation.

Answer C is also correct. Retained earnings at the end of the current year (closing balance) equal
retained earnings at the beginning of the year (opening balance) plus Net Income for the period.

7. You have the following information for company Gamma:

Current Year
Revenue $100,000
Expenses $45,000
Retained Earnings as at beginning of the year $500,000

What is the Retained Earnings balance as at the end of the current year?

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 A. $55,000
B. $555,000
C. $445,000

Answer: B
First, we need to find Net Income for the period, using the following formula:
Net Income = Revenue – Expenses
 Net Income = $100,000 - $45,000 = $55,000.

The Retained Earnings figure represents the profit resulting from business operations, or net income,
accumulated over the years, that is NOT yet distributed to owners in the form of dividends.

Therefore:
Retained Earnings (closing balance) = Retained Earnings (opening balance) + Net income for the current
period
 Retained Earnings as at the end of the year = $500,000 + $55,000 = $555,000