For the first question, I had these dot points that I memorised as a 6 mark SAC answer which got me full marks:
-Discuss how the original purchase price is verifiable by source document, so it is free from bias, which fulfills historical cost and reliability.
-Discuss how the original purchase price is not useful for decision-making, and is no longer relevant as it is inaccurate, which fulfills relevance.
-Discuss how the agreed value is useful to the users of the balance sheet, as the assets figure is accurate.
-Discuss how the original price is not relevant to the business because it was not purchased by the business, it was purchased by the owner, so the business should use its valuation at the time of transfer, not original purchase, which fulfills entity.
-Discuss how the conservatism principle states that assets and revenue should not be overstated, which means that agreed value should be used.
Basically, the APs/QCs against the use of agreed value are reliability and historical cost and those for it are relevance, entity and conservatism.
2: I'm assuming you mean accounting principle, which would be reporting period. Balance day adjustments are necessary so that profit can be accurately calculated for the current reporting period by matching revenues earned against expenses incurred. Without BDA, profit would be inaccurate because these adjustments would not have been made.
3: This is basically question 4c from the 2015 exam. You could say that profit is calculated as revenues earned less expenses incurred, as opposed to simply movements in cash. You could also go into revenues and expenses more specifically, and you should mention that balance day adjustments are made on the last day of the reporting period to ensure that revenues earned and expenses incurred are accurate.
4: This has also showed up on the exams a few times. My standard answer is firstly stating how depreciation breaches reliability because it uses estimates, which undermine the integrity of reports as it opens them up to bias, error and interpretation. You should also mention what the estimates are somewhere in this answer (useful life and residual value). I would then state that there are two methods of depreciation which allocate different expenses each reporting period, making the figure even more subjective and unreliable. However, depreciation is important because it allocates the cost of non-current assets against the revenue which it helps to earn. It therefore contributes to the calculation of profit for the reporting period, which the owner makes decisions based on. It also assists the owner in decision-making about the replacement of non-current assets by showing the historical cost as well as carrying value in the balance sheet, which indicates their level of efficiency. Therefore, while depreciation breaches reliability, it enhances the relevance of reports and contributes to an accurate calculation of profit, fulfilling the reporting period principle.
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