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Chapter 2: Question 8Q (page 61)

What is the distinction between comparability and consistency?

Short Answer

Expert verified

The difference between comparability and consistency is that comparability refers to the method of comparing two or more companies according to their position. On the other hand, consistency is defined as the similarity in policies and procedures of a firm, which aids the users in comparing the financial statements of a specific accounting period.

Step by step solution

01

Meaning of Accounting Principles

Accounting principles refer to the rules and principles that the company must adhere to while reporting the financial data in the accounting reports. It escorts the companies the way to record theaccounting transactions in the books of accounts.

02

Difference between Comparability and Consistency

Comparability and consistency differ from each other on the following grounds:

  • Comparability provides comparisons between information about two different enterprises at a certain point in time. Whereas consistency is a type of comparability that assists in comparisons between information about the same firm at two different time periods.
  • Comparability is the qualitative characteristic that helps users to recognize and understand similarities and differences among items. However, consistency is defined as adopting the same methods for the same items in different accounting periods with a reporting organization.
  • In comparability, the quality of information is compared between two or more companies. On the other hand, in the case of consistency, the quality of informationis compared within a single organization from one accounting period to the other.

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Most popular questions from this chapter

(Elements of Financial Statements) Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below.

Assets Distributions to owners Expenses Liabilities Comprehensive Income Gains Equity Revenues Losses Investments by owners

Instructions

Identify the element or elements associated with the 12 items below.(a) Arises from peripheral or incidental transactions.

(b) Obligation to transfer resources arising from a past transaction.

(c) Increases ownership interest.

(d) Declares and pays cash dividends to owners.

(e) Increases in net assets in a period from nonowner sources.

(f) Items characterized by service potential or future economic benefit.

(g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

(h) Arises from income statement activities that constitute the entity鈥檚 ongoing major or central operations.

(i) Residual interest in the assets of the enterprise after deducting its liabilities.

(j) Increases assets during a period through sale of product.

(k) Decreases assets during the period by purchasing the company鈥檚 own stock.(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

(Revenue Recognition Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the company's magazine. She feels that the 鈥渃rucial event鈥� in the process of earning revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be 鈥渞ecognized" in the period of the cash sale. Instructions

Discuss the propriety of timing the recognition of revenue in Piper Publishing Company's accounts with:

(a) The cash sale of the magazine subscription.

(b) The publication of the magazine every month.

(c) Over time, as the magazines are published and delivered to customers.

Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation鈥擝uildings 60,000

b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.

Inventory 21,000

Gain on Inventories 21,000

c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

Equipment 135,000

Common Stock 135,000

d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

Accounts Receivable 61,500

Sales Revenue 61,500

Describe the basic assumptions of accounting.

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?
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