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Chapter 2: Q1BE (page 63)

BE2-1 (L03) Match the qualitative characteristics below with the following statements. 1. Relevance 5. Comparability 2. Faithful representation 6. Completeness 3. Predictive value 7. Neutrality 4. Confirmatory value 8. Timeliness (a) Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena. (b) Having information available to users before it loses its capacity to influence decisions. (c) Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future. (d) Information that is capable of making a difference in the decisions of users in their capacity as capital providers. (e) Absence of bias intended to attain a predetermined result or to induce a particular behavior.

Short Answer

Expert verified

1) Relevance: (d)

2) comparability: (a)

3) Timeliness: (b)

4) Predictive value: (c)

5) Neutrality: (e).

Step by step solution

01

Definition of Qualitative Characteristics

The qualitativecharacteristicsare defined as the attributes that make financial information useful to the users. The users of the financial information can be shareholders, employees, investors, customers, and the government. The qualitative characteristics are comparability, relevance, predictive value, timeliness, and neutrality.

02

Concept of Relevance

Relvance matches with (d). Relevance refers to the information that has thepower to affect the decision of the stockholders.

03

Concept of Comparability

Comparability matches with (a). Comparability is the feature and quality of the information which allowsusers to determine the diiferences and simillaritiesbetween two pieces of economic information.

04

Concept of Timeliness

Timeliness matches with (b). Timeliness of the infomation is the feature which states that the information hasto be ready for decisionmaking purposes,and needs to be used before it losesits ability to change the economic decisions of the users.

05

Concept of Predictive Value

Predictive value matches with (c). Predictive value is the estimation or economic input that is crucial forthe users and capital providers to determine future outcomes.

06

Concept of Neutrality

Neutrality matches with (e). Neutrality implies avoiding any type of bias to achieve a predetermined result.

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Most popular questions from this chapter

Describe the basic assumptions of accounting.

Question: What are some of the differences in elements in the IASB and FASB conceptual frameworks?

E2-2 (L01,2,3) (Usefulness, Objective of Financial Reporting, Qualitative Characteristics) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.

  1. The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability.
  2. Relevant information only has predictive value, confirmatory value, or both.
  3. (c)Information that is a faithful representation is characterized as having predictive or confirmatory value.
  4. Comparability pertains only to the reporting of information in a similar manner for different companies.
  5. Verifiability is solely an enhancing characteristic for faithful representation.
  6. In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information.

Instructions

a) Describe briefly the following characteristics of useful accounting information.

1. Relevance (4) Comparability

2. Faithful representation (5) Consistency

3. Understandability

b)For each of the following pairs of information characteristics, give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other.

1. Relevance and faithful representation.

2. Relevance and consistency.

3. Comparability and consistency.

4. Relevance and understandability.

c) What criterion should be used to evaluate trade-offs between information characteristics?

According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.
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