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Chapter 2: Q.2-29Q (page 61)

Question: What are some of the costs of providing accounting information? What are some of the benefits of accounting information? Describe the cost-benefit factors that should be considered when new accounting standards are being proposed.

Short Answer

Expert verified

Answer

Some of the costs of supplying accounting information include: the cost of assembling information, processing, distributing information, and costs of auditing, disclosure as well as potential litigation.

Some of the advantages of accounting information are: higher control of management and availability of capital at a lower cost.

New accounting standards need a demonstration of information that is not easily collected by the accounting systems of most firms.

Step by step solution

01

Meaning of accounting information

Accounting information is defined as the accounting statements processed by way of accounting and bookkeeping. It includes both financial and non-financial data and is utilized by a large body of users such as customers, employees, investors, creditors, and the government.

02

Costs of providing accounting information

Costs of supplying accounting information comprise the cost of gathering as well as processing, distributing, auditing, potential litigation, exposure to competitors, inspection, and evaluation.

03

Some of the benefits of accounting information

Advantages to users comprise higher control of management and obtaining capital at a minimal cost. Users may get more effective information for allotment of resources, tax evaluation, and adjustment of rates.

04

Cost-benefit factors considered when new accounting standards are proposed

New accounting standards need displaying of information that is not easily collected by most firms. Verification should be made to ascertain whether the supplemental costs of supplying the suggested information surpass the additional benefits to be received. Such verification needs an application of judgement as the advantages of the expected information may not be clear cut.

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Most popular questions from this chapter

E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

  1. Fair value changes are not recognized in the accounting records.
  2. Financial information is presented so that investors will not be misled.
  3. Intangible assets are amortized over periods benefited.
  4. Agricultural companies use fair value for purposes of valuing crops.
  5. Each enterprise is kept as a unit distinct from its owner or owners.
  6. All significant post-balance-sheet events are disclosed.
  7. Revenue is recorded when the product is delivered.
  8. All important aspects of bond indentures are presented in financial statements.
  9. Rationale for accrual accounting.
  10. The use of consolidated statements is justified.
  11. Reporting must be done at defined time intervals.
  12. An allowance for doubtful accounts is established.
  13. Goodwill is recorded only at time of purchase.
  14. A company charges its sales commission costs to expense

Question: The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting.

  1. Business reporting should exclude information outside of management鈥檚 expertise or for which management is not the best source, such as information about competitors.

  2. Management should not be required to report information that would significantly harm the company鈥檚 competitive position.

  3. Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast themselves the company鈥檚 financial future.

  4. Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business.

  5. Companies should present certain elements of business reporting only if users and management agree they should be reported- a concept of flexible reporting.

  6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.

Instructions

For each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting.

What is meant by term 鈥渜ualitative characteristics of accounting information鈥�?

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

What is the primary objective of financial reporting?

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