ACCA FA Context and purpose of financial reporting: practice questions with answers

Question 1

Within the IFRS Foundation's structure, which of the following is a role of the IFRS Interpretations Committee?

1. A Developing and issuing IFRS Accounting Standards after public consultation on discussion papers and exposure drafts
2. B Reviewing financial reporting issues that existing standards do not specifically address and developing interpretations, which are ratified by the IASB
3. C Appointing the members of the standard-setting boards and overseeing the funding and governance of the organisation
4. D Developing IFRS Sustainability Disclosure Standards covering sustainability-related and climate-related disclosures

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Answer: B. The IFRS Foundation is the parent body. Its Trustees oversee governance and funding and appoint board members. The IASB develops and issues IFRS Accounting Standards, and the ISSB issues IFRS Sustainability Disclosure Standards. The IFRS Advisory Council advises the boards and Trustees. The IFRS Interpretations Committee reviews issues that are not specifically dealt with in existing standards, or where unsatisfactory or conflicting interpretations have developed, and issues interpretations that must be ratified by the IASB.

Question 2

Corvane Co is deciding whether to supply raw materials to Pellow Co on 60-day credit terms. Which aspect of Pellow Co's financial statements is Corvane Co most likely to focus on?

1. A The trend in Pellow Co's dividend per share over the last five years and the prospects for future dividends
2. B The average remuneration paid to Pellow Co's employees and the security of employment it offers
3. C The amount of Pellow Co's taxable profit, to confirm it is paying the correct amount of tax
4. D Pellow Co's liquidity, in particular whether its current assets are sufficient to pay its payables as they fall due

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Answer: D. Different users need different information. Suppliers and other trade payables want to know whether amounts owing to them will be paid when due, so they focus on liquidity (cash, current ratio, quick ratio, payables payment period). Investors focus on returns and dividends, employees on stability and pay, and the tax authorities on taxable profits.

Question 3

The IASB's Conceptual Framework for Financial Reporting identifies the primary users of general purpose financial reports. Who are they?

1. A The entity's directors and managers, who use the reports to plan and control the day-to-day running of the business
2. B Government departments and tax authorities, which use the reports to collect taxes and prepare national statistics
3. C Existing and potential investors, lenders and other creditors, who cannot require the entity to give them information directly
4. D Members of the general public, such as local residents and pressure groups interested in the entity's activities

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Answer: C. The Conceptual Framework states that the objective of general purpose financial reporting is to provide information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity (buying, selling or holding equity and debt, and providing or settling loans and other credit).

These are the primary users because most of them cannot require the entity to provide information directly to them. Management does not need to rely on the reports, since it has internal information. Regulators, governments and the public may find the reports useful, but the reports are not primarily directed at them.