Question 2

The accountant of Lala Bhd is considering a number of transactions and events and how they should be treated in accordance with the concepts and qualitative characteristics of financial information as set out in the conceptual framework.

During the year ended 31 March 2019, Lala Bhd experienced the following transactions or events.

1. Sold and asset to a finance company and leased it back for the remainder of its useful life. The accountant decided that this should be treated as a secured loan.
2. The companys statement of profit or loss prepared using historical costs showed a loss from operating its shops, but the company aware that the increase in the value of its properties during the period far outweighed the operating loss.
3. Inventory has up to this year been valued using FIFO but the accountant is considering changing to the weighted method for the year to 31 March 2019.

Based on the above situation answer the following questions:

1. The accountant is aware that some members of the Board of Lala Bhd have little understanding of accounting and he worried about his presentation of the financial statements at the board meeting. How should he deal with this situation?

1. In doing his presentation he should omit any complex issues, so that everybody can understand what he is saying.
2. He should open his presentation with the advice that some of them may not understand all of it.
3. He classifies, characterise and present the information clearly and precisely.
4. He should deliver his presentation just to those who are financially qualified.

2. Which concept or qualitative characteristics has influenced the decision in (i) above?

1. Faithful representation
2. Verifiability
3. Accruals
4. Comparability

3. In looking at issue (ii) above, the accountant decides that the properties should be revalued. Which concept or qualitative characteristic has been applied in making this decision?

1. Materiality
2. Going concern
3. Relevance
4. Timeliness

4. Because loss on operating the shops, the accountant is considering the issue of going concern. If it was decided that Lisbon was no longer a going concern at 31 March 2019, which of the following would apply in accordance with the conceptual framework?

1. Financial statements do not need to be prepared.
2. All the assets should be liquidated.
3. The financial statements should be prepared on a different basis.
4. The financial statements should be prepared as normal and the going concern status disclosed in the notes.

5. In applying the principle of comparability, how should the change of inventory valuation basis be accounted for?

1. The change should be disclosed.
2. The financial statements for 31 March 2019 should show both methods.
3. The notes should show what the profit would have been if the change had not taken place.
4. The financial statements for the prior period as shown at 31 March 2019 should be restated using the weighted average basis.

[10 marks]