I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

ANSWER 

A 

If the business is to be closed down, the remaining three machines must be valued at the amount 

they will realise in a forced sale, ie 3 × $60 = $180.  

B 

If the business is regarded as a going concern, the inventory unsold at 31 December will be 

 

carried forward into the following year, when the cost of the three machines will be matched 

 

against the eventual sale proceeds in computing that year's profits. The three machines will 

 

therefore be valued at cost, 3 × $100 = $300. 

 

If the going concern assumption is not followed, that fact must be disclosed, together with the following 

information. 

(a) 

The basis on which the financial statements have been prepared 

(b) 

The reasons why the entity is not considered to be a going concern 

2.2.2 Accruals basis 

Accruals basis

. The effects of transactions and other events are recognised when they occur (and not as 

cash or its equivalent is received or paid) and they are recorded in the accounting records and reported 

in the financial statements of the periods to which they relate.   

 

The accruals basis is not an underlying assumption but para. 1.17 of the Conceptual Framework for 

Financial Reporting 2018 makes it clear that financial statements should be prepared on an accruals 

basis.  

Entities should prepare their financial statements on the basis that transactions are recorded in them, 

not as the cash is paid or received, but as the revenues or expenses are earned or incurred in the 

accounting period to which they relate. 

According to the accruals assumption, in computing profit revenue earned must be matched against the 

expenditure incurred in earning it. This is also known as the matching convention. 

Example: accruals basis 

Emma purchases 20 T-shirts in her first month of trading (May) at a cost of $5 each. She then sells all 

of them for $10 each. Emma has therefore made a profit of $100, by matching the revenue ($200) 

earned against the cost ($100) of acquiring them.  

All of Emma’s sales and purchases are on credit and no cash has been received or paid. 

If, however, Emma only sells 18 T-shirts, it is incorrect to charge her statement of profit or loss with the 

cost of 20 T-shirts, as she still has two T-shirts in inventory. Therefore, only the purchase cost of 

18 T-shirts (18 × $5 = $90) should be matched with her sales revenue (18 × $10 = $180), leaving 

her with a profit of $90. 

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CHAPTER 3  

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  THE QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION