What Is Meant by Relevance, Reliability and Comparability and How They Make Financial Information Useful.

Topics: Tax, Depreciation, Generally Accepted Accounting Principles Pages: 4 (816 words) Published: March 19, 2009
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CIMA MANAGERIAL PAPER 7

FINANCIAL ACCOUNTING AND TAX PRINCIPLES

INTERNAL ASSESSMENT

PLEASE ANSWER ALL QUESTIONS
ANSWERS MUST BE SUBMITTED BY 23/03/09.

1. The qualitative characteristics of relevance, reliability and comparability identified in the IASB’s Framework for the preparation and presentation of financial statements (Framework) are some of the attributes that make financial information useful to the various users of financial statements.

Required:
Explain what is meant by relevance, reliability and comparability and how they make financial information useful. (10 marks)

(b) During the year ended 31 March 2006, Porto experienced the following transactions or events:

(i) entered into a finance lease to rent an asset for substantially the whole of its useful economic life.

(ii) a decision was made by the Board to change the company’s accounting policy from one of expensing the finance costs on building new retail outlets to one of capitalising such costs.

(iii) the company’s statement of comprehensive income prepared using historical costs showed a loss from operating its hotels, but the company is aware that the increase in the value of its properties during the period far outweighed the operating loss.

Required:
Explain how you would treat the items in (i) to (iii) above in Porto’s financial statements and indicate on which of the Framework’s qualitative characteristics your treatment is based. (15 marks)

2. Elite Leisure is a private limited liability company that operates a single cruise ship. The ship was acquired on 1 October 1996. Details of the cost of the ship’s components and their estimated useful lives are:

component original cost ($million) depreciation basis Ship’s fabric (hull, decks etc) 300 25 years straight-line Cabins and entertainment area fittings 150 12 years straight-line Propulsion system 100...
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