TOPIC 2

Introduction to Qualitative Characteristics of Useful Financial

Information and Other Accounting Assumptions and
Concepts/ Introduction to Conceptual Framework

Multiple Choice Questions

1. D
2. B
3. A
4. C
5. C
6. D
7. A
8. B

True and False Questions

1. - False
2. - True
3. - False
4. - False
5. - True

Theory Questions

1. Answer:
Accounting concepts and conventions are broad rules that have been developed by
accountants for recording and reporting on the financial statements.

2. Answer:
Concepts and conventions are developed to suit the needs of the financial statement
users like the owners, shareholders, account payables, government, bankers and
others. Accountants use accounting concepts and conventions as guidelines in the
preparation of financial statements thus the statements prepared are comparable and
reliable.

3.
a) Accrual-based Concept
Answer:
Revenue is recognized as it is earned irrespective of whether cash has been received or
not. Any expenses made for the benefits of a particular accounting period is recognized
as it is incurred irrespective of whether cash has been paid or not. This concept is also
known as the Matching Concept. For example, a business received its utility bills of
RM1,000 during the year. At the end of the accounting year, it pays RM400. Even
though only RM400 was paid, the statement of comprehensive income records
expenses of utility bills as RM1,000 because of accrual-based concept.
 b)
Answer:
The user of financial statements can compare the financial statements of an entity
with the other enterprise's financial statements to analyze and evaluate their
performance and financial position and to identify trends in an entity’s performance
with reasonable convenience. For example, users can compare the performance and
position of Telekom Malaysia using its financial statements of 2011 and 2012
because they are comparable. Thus, users can conclude that the performance and
position has improved or deteriorated

c)
Answer:
The materiality concept is concerned with the significance of information and amount
contained in an accounting record. The materiality is referred to how far the transaction
will affect the accuracy of the financial statement prepared. The question as to what
may be considered as 'material' would depend on judgment and circumstances of the
particular case. The normal basis of judgment is the amount of the item (whether it is
small or big amount) and the size of the business (small, medium or big business). For
example, a calculator worth RM500 may be decided according to the materiality concept
for different sizes of business. Therefore, a large corporation such as TNB Berhad might
record RM500 in the statement of comprehensive income as an expense while the small
business record in the statement of financial position as an asset.

4.
a) TNT Express Bhd. has traditionally depreciated its furniture and equipment using
the straight-line method. This year it has adopted the reducing balance method
without advising its financial statement shareholders of this change. As a result, it
is violating the consistency concept.
b) A food catering business has in recent years, experienced financial problems in its
business. It is in the stage of bankruptcy. However, it has recorded all the
accounts as though it is still in a good financial position. This is not following the
going concern concept.
c) Syarikat Hali's Bhd. is a registered public company dealing with housing
development. The company took a bank loan worth RM15 million from Maybank
repayable within 10 years. However, after a period of 12 years this company failed
to repay its loan. The bank decided to confiscate all the personal properties of the
shareholders. This is against the business entity concept.
d) A supermarket owner sells all kinds of groceries for its customers. It records all the
purchases and its sales in the accounting books in terms of RM. This is in
accordance with the monetary concept.
e) Tiptop Trading records revenue when products are delivered and services being
rendered, even though cash has not yet been received. The company is applying
the accrual based concept.
5.
a) Al-Aimi Trading acquired new office equipment. The equipment will be used for 10
years in the business. Depreciation will be provided on a straight line basis as to be
similar to the other equipments owned by the business ± Consistency concept
b) As an accounts clerk, Rohani only records those transactions that can be
measured in monetary terms ± Monetary concept
c) The owner of Tirai Seri Sdn. Bhd. took RM5.000 worth of goods for his wife. For
accounting purposes, the owner is always considered to be separate and distinct
from the business which he owns ± Business entity concept

6.
Answer:
ƒBusiness entity - the entity is separate and distinct from the owner
ƒGoing concern - the business will continue to operate indefinitely
ƒMonetary - all the business transactions must be recorded in monetary units which is
Ringgit Malaysia (RM)
ƒOr any relevant answer

7.

Answer:
ƒ Business entity - the entity is separate and distinct from the owner
ƒ Going concern - the business will continue to operate indefinitely
ƒ Monetary - all the business transactions must be recorded in monetary units which
is Ringgit Malaysia (RM)
ƒ Or any relevant answer

8.

Answer:
ƒ Business entity - the entity is separate and distinct from the owner
ƒ Going concern - the business will continue to operate indefinitely
ƒ Monetary - all the business transactions must be recorded in monetary units which
is Ringgit Malaysia (RM)
ƒ Or any relevant answer

9.

Answer:
ƒ Business entity - the entity is separate and distinct from the owner
ƒ Going concern - the business will continue to operate indefinitely
ƒ Or any relevant answer
10.

Answer:
ƒ Going concern - the business will continue to operate indefinitely
ƒ Monetary - all the business transactions must be recorded in monetary units which
is Ringgit Malaysia (RM)
ƒ Or any relevant answer

11.
Answer:

1. Purchase of items like marker pen and stapler for business use is not recorded as
assets, but treated as expenses – Materiality Concept
2. Revenues are recognized when they earned and not when they are received in cash
– Accrual-Based Concept
3. Only business transactions that can be measured in monetary value are recorded in
accounting – Monetary Concept
4. Business is assumed to operate for an indefinitely long period of time unless proven
by evidence that it is going to be liquidated in the near future – Going Concern
Concept
5. A business transactions are recorded separately from the owner’s personal
transactions – Business Entity / Separate Entity Concept