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Chapter 2: Question 4Q (page 61)
Briefly describe the two fundamental qualities of useful accounting information.
The two fundamental qualities of useful accounting information are relevance and accuracy.
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Identify which basic assumption of accounting is best described in each item below.
a)The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports.
b)Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.
c)Walgreen Co. reports current and non-current classifications in its balance sheet.
d)The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.
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?
Statement of Financial Accounting Concepts No.5 identifies four characteristics that an item must have before it is recognized in the financial statements. What are these four characteristics?
Question: An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time period. In some situations, costs are recognized as expenses at the time of product sale. In other situations, guidelines have been developed for recognizing costs as expenses or losses by other criteria.Instructions
Question: For each item below, indicate to which category of elements of financial statements it belongs.
(a) Retained earnings (f) Loss on sale of equipment
(b) Sales (g) Interest payable
(c) Additional paid-in capital (h) Dividends
(d) Inventory (i) Gain on sale of investment
(e) Depreciation (j) Issuance of common stock
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