FINANCIAL ACCOUNTING AND REPORTING I (A161)

ANSWER MINI CASE 1

CONCEPTUAL FRAMEWORK

QUESTION 1(A)
1. Free from Error/ (Ingredients of fundamental quality)
free from error
2. Neutrality / (Ingredients of fundamental quality)
free of any bias,
3. Complete / (Ingredients of fundamental quality)
Information of our company should be completely in words and amounts
4. Materiality / (Ingredients of fundamental quality)
It is important to report information that has a sufficient importance in terms of value
and/or nature
5. Predictive value / (Ingredients of fundamental quality)
it is relating to the amount and timing of cash flows for predictive and confirmatory
purposes.
6. Timeliness (enhance quality)
We should report information that influences economic decisions on time
7. Comparability (enhance quality)

The usefulness of the information presented in financial statements can be further

improved by providing information for the previous two years.
8. Understandability (enhance quality)
differing people can easily understand it
9. Verifiability (enhance quality)
and should draw similar conclusions..

QUESTION 2

1. The expenditure of developing a new type of cosmetic product meets asset definition as:
(1) it represents future economic benefits via sale a new type of cosmetic product; (2) the
benefits are controlled, as AAA Bhd will enjoy the economic benefits flowing from the
new product; and (3) there is a past event, as AAA has already spent the RM500,000.
However, under the Conceptual Framework an asset is recognized only when it is
probable that the future economic benefits will flow to the entity and the asset has a cost
or value that can be reliably measured. The expenditure fails the probability criterion, as
it is not yet possible to predict whether the project will prove to be commercially
relevant.
Accordingly, AAA Bhd cannot (yet) recognize the expenditure as an asset.
2. The Conceptual Framework defines income as increases in economic benefits during the
period in the form of inflows or enhancements of assets or decreases in liabilities that
result in increases in equity, other than those relating to owners contributions.
The 50% payment gives rise to income as the below characteristics are present:
The increase is in the form of an asset increase as the cash of RM 25,000 is received;
BUT; No increase in equity: As assets have increased and liabilities have also increased.
AND; The concept of accrual basis has not been fulfilled where the income cannot (yet)
to be recognized as the service is not yet provided.
3. The Conceptual Framework defines expenses as decreases in economic benefits during
the period in the form of asset decreases or liability increases that result in decreases in
equity, other than those relating to distributions to owners. The theft of the RM 20,000
cash satisfies the expense definition as:
It is a decrease in economic benefits during the period, as cash (economic
benefits) has decreased;
The decrease in economic benefits is in the form of an asset decrease, as cash (an
asset) has decreased; and
It has resulted in a decrease in equity, as assets have decreased and liabilities have
not changed.
In accordance with the Conceptual Framework an expense must be recognized when: A
decrease in economic benefits related to an asset increase or a liability decrease has
arisen; and the decrease can be reliably measured.

The theft of the cash satisfies both recognition criteria as:

The decrease in economic benefits related to an asset decrease (a decrease in
cash) has occurred; and
The decrease can be reliably measured, as the amount of cash lost is known (ie
RM 20,000).
Accordingly, an expense of RM20,000 must be recognized.

4. The asset definition is present.

Past event: the acceptance of donation.
Flow of future economic benefits: The cash represents an inflow of $15,000 cash
benefit into AAA Bhd.
Control over the future economic benefits: AAA Bhd will benefit from this
RM15,000 cash inflow and can deny or regulate the access of others to this cash
inflow.
The asset recognition criteria are met, as it is probable (actually, it is certain) that an
inflow of economic benefits (cash) will flow to the entity, and the amount ($15,000)
can be reliably measured as it is known.
Therefore, an asset of RM15,000 must be recognized.

QUESTION 3
1. (a) Increase Total Assets by a net amount of $12,000 (increase Machinery $20,000 and
decrease Cash $8,000) and increase Liabilities by $12,000 (Notes Payable $12,000)
(b) Decrease Assets by $3,000 (decrease Cash) and decrease Liabilities by $3,000 (decrease
Notes Payable)
2.

(a) Assets increase; liabilities increase

(b) No effect
(c) Assets decrease; owner's equity decreases
(d) Assets increase; owners equity increases
(e) Assets increase; owners equity increases

3. Total assets decrease $20,000 (Cash increases by $45,000; Land decreases by

$65,000).
Total liabilities decrease $40,000 (Note payoff to Regions) Owner's equity increases
$20,000 (Sales price Cost of the land).
Ending capital

$30,000

Beginning capital

58,000

Decrease in capital

$28,000

Less: Owners withdrawals

Net loss

25,000
$ 3,000

4.