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Chapter 2: Q.2-28Q (page 61)

Question: Describe the major constraint inherent in the presentation of accounting information.

Short Answer

Expert verified

Answer

Accounting information is liable to the cost constraint. Information is not beneficial till its advantages of it surpass the cost of arranging it.

Step by step solution

01

Meaning of Accounting Information

Accounting information is defined as the medium used by the entities for communicating with the internal and external parties. Users of accounting information comprise employees, shareholders, banks, creditors and government agencies.

02

Major constraint inherent in the presentation of accounting information

The major constraints on displaying accounting information include:

  • The principle of materiality indicates that only similar items should be displayed in the financial statements, but the full disclosure principle states to display all the considerable items in the financial statements.
  • The principle of timeliness states that every bit of information is to be given time, whether the information is accurate or not.
  • The principle of cost-benefit analysis indicates that each element of the accounting record must be identified by its cost and advantage, but the inspection of cost-benefit becomes tedious when the element cannot be evaluated.
  • Another constraint of accounting information is industry practices, as industry practices occasionally do not tally with the accounting principles.

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Most popular questions from this chapter

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?

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.

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.

a) Legal fees paid in connection with the purchase of land are \(1,500.

b) Eduardo, Inc. paves the driveway leading to the office building at a cost of \)21,000.

c) A meat market purchases a meat-grinding machine at a cost of \(3,500.

d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.

e) Smith's Hardware Company pays \)9,000 in wages to laborers for construction on a building to be used in the business.

f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.

BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.

  1. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
  2. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
  3. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
  4. Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

Identify which basic principle of accounting is best described in each item below.(a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.(b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.(d) Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.
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