Question 1 (b)

Short notes: fundamental accounting assumptions; prior period items

12 marks

Time to write: About 24 minutes
Topic: Conceptual framework items
Notes: Crux notes

Question

Question 1 (b) · 12 marks

Write a short note on any two:

The Fundamental Accounting Assumptions
Prior period items
The need of IFRS (6+12=18)

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

24 minfor 12 marks

Read from the question

any twoAnswer any 2 of the 3, 6 marks each. Only 2 are marked: a third earns nothing.
short noteA note opens with the meaning, then two or three key points. No long introduction.

Write it in this order

The parts stand alone: start with the one you are surest of.

Read; underline the asks; jot your points 2 min
1 Fundamental accounting assumptions: meaning and AS 1 status 2 marks 3 min
2 Going concern, consistency and accrual explained; disclosure 4 marks 7 min
3 Prior period items: meaning and causes 3 marks 5 min
4 Prior period items: what they exclude, treatment and an example 3 marks 5 min
Check: every ask answered, key terms underlined 2 min

1234

Easy marks

Steps 1 and 3 opens with the meaning: a one-line definition, the quickest mark in each.
Choose the ones you know best: each carries the same marks.

Short on time? A few lines on every part beat a full answer to one: each part is capped at its own marks.

Try it first. About 24 minutes for 12 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Two notes are written, as the question allows: (i) the fundamental accounting assumptions and (ii) prior period items.

(i) The fundamental accounting assumptions

Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not stated, because their acceptance and use are assumed; disclosure is needed only if they are not followed. AS 1 names three:

Going concern. The enterprise is normally viewed as continuing in operation for the foreseeable future, with neither the intention nor the necessity of liquidation or of materially curtailing the scale of its operations. Assets are therefore shown at cost less depreciation, not at what they would fetch in a forced sale.
Consistency. Accounting policies are assumed to be consistent from one period to another, so that the results of different years can be compared.
Accrual. Revenues and costs are recognised as they are earned or incurred, not as cash is received or paid, and are recorded in the period to which they relate.

If going concern, consistency and accrual are followed, no specific disclosure is required; if any of them is not followed, that fact should be disclosed.

(ii) Prior period items

Meaning. “Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods” (AS 5, para 4.3). Errors may come from mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight.

What they are not. The term does not cover other adjustments that relate to earlier periods but are determined now, such as arrears of wages payable after a revision with retrospective effect. Nor is a change in an accounting estimate a prior period item.

Treatment. Prior period items are normally included in the net profit or loss of the current period, or shown after the current net profit is struck; either way the aim is to show their effect on the current profit. Their nature and amount are disclosed separately, so that their effect can be seen.

Example. Wages of the previous year omitted from that year's books and found this year are a prior period item; the extra wages after a revision of pay with retrospective effect are not.

Where the 12 marks sit

#	Component	Marks
1	Fundamental accounting assumptions: meaning and AS 1 status	2
2	Going concern, consistency and accrual explained; disclosure	4
3	Prior period items: meaning and causes	3
4	Prior period items: what they exclude, treatment and an example	3
	Total	12

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