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Chapter 2: Q4E (page 66)

E2-4 (L03) (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows.

Relevance Neutrality Verifiability

Faithful representation Completeness Understandability

Predictive value Timeliness Comparability

Confirmatory value Materiality Free from error

InstructionsIdentify the appropriate qualitative characteristic(s) to be used given the information provided below.

(a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.

(b) Quality of information that confirms users鈥� earlier expectations.

(c) Imperative for providing comparisons of a company from period to period.

(d) Ignores the economic consequences of a standard or rule.

(e) Requires a high degree of consensus among individuals on a given measurement.

(f) Predictive value is an ingredient of this fundamental quality of information.

(g) Four qualitative characteristics that are related to both relevance and faithful representation.

(h) An item is not recorded because its effect on income would not change a decision.

(i) Neutrality is an ingredient of this fundamental quality of accounting information.

(j) Two fundamental qualities that make accounting information useful for decision-making purposes.

(k) Issuance of interim reports is an example of what enhancing quality of relevance?

Short Answer

Expert verified

(a)Comparability

(b)Confirmatory value

(c) Comparability

(d) Neutrality

(e) Verifiability

(f) Relevance

(g) Comparability, Verifiability, Timeliness, Understandability

(h) Materiality

(i) Faithful representation

(j) Relevance and faithful representation

(k) Timeliness

Step by step solution

01

Meaning of Accounting Information

Accounting information provides beneficial and important information about the transactions and events of the business entity.

02

Explanation for (a)

Comparability 鈥� When companies are using the same type of accounting principles to prepare financial statements, it becomes easy for the companies to compare them within the same type of industry.

03

Explanation for (b)

Confirmatory value 鈥� It means the information provides feedback on the earlier evaluations and helps the users confirm or change the options based on the earlier expectations.

04

Explanation for (c)

Comparability 鈥� The comparability helps the companies to compare the results of the company from time to time.

05

Explanation for (d)

Neutrality 鈥� It means that the company must prepare financial statements so that there should be unbiased financial statements irrespective of the consequences that may arise because of the unbiased financial statements.

06

Explanation for (e)

Verifiability 鈥� The financial information must be verifiable. The same results should come even if the company accounts prepare financial statements or external auditors prepare financial statements. The individuals must draw the same opinions and have a consensus about the measurements.

07

Explanation for (f)

Relevance 鈥� The accounting information must be relevant, and the information must be able to make predictions based on past events.

08

Explanation for (g)

Comparability 鈥� The comparability helps the companies to compare from time to time the profits from one year to another year or compare the results from other companies.

Verifiability 鈥� Verifiability means the financial statements must be verifiable, and the results must be consistent.

Timeliness 鈥� The information must reach the accounting team quickly so the business entity can make the required timely decisions quickly and accurately.

Understandability 鈥� The financial statements must be clear and easy to understand. Decision-makers make accurate decisions based on the financial statements.

09

Explanation for (h)

Materiality 鈥� Materiality means that even if the items related to materials are included or excluded, that does not affect the decisions of the business.

10

Explanation for (i)

Faithful representation 鈥� The company must record all the business transactions without hiding any information from the financial statements.

11

Explanation for (j)

Relevance and Faithful representation 鈥� The accounting information must be relevant and should be able to compare the results from one year to another year. The information must be presented in an unbiased manner without hiding any information.

12

Explanation for (k)

Timeliness 鈥� The accounting information must be able to make effective decisions from time to time. Interim reports help the company to make timely decisions.

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Most popular questions from this chapter

GROUPWORK (Accounting Principles and Assumptions鈥擟omprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc.

Instructions

In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.

(a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made.Miscellaneous Expense 29,000Cash 29,000

(b) Merchandise inventory that cost \(620,000 is reported on the balance sheet at \)690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.Inventory 70,000Sales Revenue 70,000

(c) The company is being sued for \(500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry.Loss from Lawsuit 500,000Liability for lawsuit 500,000

(d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a \)16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entryDepreciation Expense 16,000Accumulated Depreciation Equipment 16,000

(e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at \(800,000 was written off as follows.

(f) Because of a 鈥渇ire sale.鈥� equipment obviously worth \)200,000 was acquired at a cost of $155,000. The following entry was made.Equipment 2000Cash 155,000Sales Revenue 45,000

What are the enhancing qualities of the qualitative characteristics? What is the role of enhancing qualities in the conceptual framework?

Which of the following statements about the IASB and FASB conceptual frameworks is not correct?

(a) The IASB conceptual framework does not identify the element comprehensive income.

(b) The existing IASB and FASB conceptual frameworks are organized in similar ways.

(c) The FASB and IASB agree that the objective of financial reporting is to provide useful information to investors and creditors.

(d) IFRS does not allow use of fair value as a measurement basis.

BE2-9 (L05) If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in thefinancial statements for the following items.

(a) Land. (d) Inventory.

(b) Unamortized bond premium. (e) Prepaid insurance.(c) Depreciation expense on equipment.

What are the four basic assumptions that underlie the financial accounting structure?
See all solutions

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