ANWSER
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Question 1 (2017/2018 Exam):
(a) Explain the various concepts of capital maintenance.
Answer:
Capital maintenance refers to the accounting concept that a company must maintain its capital base before it can recognize a profit. The two main concepts are:
1. Financial Capital Maintenance: Profit is earned only if the financial amount of net assets at the end of the period exceeds the financial amount at the beginning, excluding any contributions from or distributions to owners. It can be measured in nominal monetary units or constant purchasing power.
2. Physical Capital Maintenance: Profit is earned only if the physical productive capacity (operating capability) of the entity at the end of the period exceeds the physical productive capacity at the beginning, excluding any owner contributions or distributions.
(b) Discuss the purposes for which businesses measure their income.
Answer:
Businesses measure income for the following purposes:
1. Performance Evaluation: To assess the profitability and efficiency of the business operations.
2. Decision-Making: To aid management, investors, and creditors in making informed economic decisions.
3. Taxation: To determine the tax liabilities of the business.
4. Dividend Distribution: To decide the amount of profits that can be distributed to shareholders.
5. Regulatory Compliance: To meet legal and financial reporting requirements.
6. Planning and Forecasting: To facilitate budgeting and future financial planning.
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Question 2 (2017/2018 Exam):
(a) Distinguish between the Deductive and Inductive Approach.
Answer:
– Deductive Approach: Starts with general accounting principles or assumptions and applies them to specific situations to derive accounting rules. It is a top-down approach.
– Inductive Approach: Begins with observations of specific accounting practices and generalizes them to form broader principles or theories. It is a bottom-up approach.
(b) What are the advantages and disadvantages of each approach?
Answer:
Deductive Approach:
– *Advantages:* Logical consistency, theoretical soundness, and applicability to new situations.
– *Disadvantages:* May lack practical relevance if assumptions are unrealistic.
Inductive Approach:
– *Advantages:* Grounded in real-world practices, practical relevance.
– *Disadvantages:* May lack theoretical rigor and can be influenced by biased observations.
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Question 3 (2017/2018 Exam):
What is an Accounting Theory?
Answer:
Accounting theory is a coherent set of principles, assumptions, and frameworks that provide a systematic explanation and understanding of accounting practices. It serves as a foundation for developing accounting standards, guiding financial reporting, and addressing practical issues in accounting.
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Question 4 (2017/2018 Exam):
(a) Match the qualitative characteristics to the questions.
Answer:
i. C. Understandability
ii. G. Relevance
iii. H. Verifiability
iv. A. Reliability
v. J. Representational Faithfulness
vi. B. Neutrality
vii. J. Consistency
viii. F. Materiality
(b) Relationship between Understandability and the user’s background.
Answer:
Understandability depends on the user’s knowledge of business, accounting, and economic activities. Information should be presented clearly and concisely, but the user must also have the necessary expertise to interpret it correctly.
(c) Clash between Relevance and Neutrality.
Answer:
Relevance requires information to influence decision-making, which may lead to selective presentation of data. Neutrality demands unbiased and fair representation. A clash occurs when relevant information is presented in a way that could bias users, compromising neutrality.
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Question 1 (2018/2019 Exam):
(a) What are qualitative characteristics?
Answer:
Qualitative characteristics are attributes that make financial information useful to users. They include relevance, reliability, comparability, and understandability.
(b) Explain relevance and reliability.
Answer:
– Relevance: Information is relevant if it can influence the economic decisions of users by helping them evaluate past, present, or future events or confirming/correcting their past evaluations.
– Reliability: Information is reliable if it is free from material error and bias, faithfully represents what it purports to represent, and is verifiable and neutral.
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Question 2 (2018/2019 Exam):
(a) Contrast Descriptive and Normative approaches.
Answer:
– Descriptive Approach: Describes and explains current accounting practices without judgment.
– Normative Approach: Prescribes how accounting should be done based on theoretical principles or ideals.
(b) Steps in Deductive Reasoning for Theory Construction.
Answer:
1. Define objectives or assumptions.
2. Identify key concepts and principles.
3. Formulate hypotheses or rules.
4. Test the hypotheses against real-world scenarios.
5. Refine the theory based on feedback.
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Question 3 (2018/2019 Exam):
(a) Factors affecting accounting development.
Answer:
1. Globalization of businesses.
2. Technological advancements.
3. Regulatory changes.
4. Economic crises.
5. Stakeholder demands for transparency.
(b) Consequences of changing accounting environment.
Answer:
1. Increased complexity in financial reporting.
2. Greater emphasis on fair value accounting.
3. Convergence of international accounting standards.
4. Enhanced focus on corporate governance.
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Question 4 (2019/2020 Exam):
(a) Concepts of capital maintenance.
Answer:
Same as Question 1(a) above.
(b) Appropriate concepts for decision-makers.
Answer:
– Shareholders: Financial capital maintenance (focus on monetary returns).
– Management: Physical capital maintenance (focus on operational capacity).
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Question 5 (2019/2020 Exam):
(a) Accounting vs. Economic Income.
Answer:
– Accounting Income: Based on historical cost and realized transactions.
– Economic Income: Based on changes in present value of future cash flows.
(b) Income and Value in Economic Income.
Answer:
Economic income reflects changes in the value of assets and liabilities over time, linking income directly to wealth creation.
(c) Cost Concept Effect on Accounting Income.
Answer:
The cost concept leads to conservative income measurement, as it ignores unrealized gains and focuses on historical costs.
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Question 6 (2019/2020 Exam):
Purposes of income measurement.
Answer:
Same as Question 1(b) above.
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