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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

BE2-1 (L03) Match the qualitative characteristics below with the following statements. 1. Relevance 5. Comparability 2. Faithful representation 6. Completeness 3. Predictive value 7. Neutrality 4. Confirmatory value 8. Timeliness (a) Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena. (b) Having information available to users before it loses its capacity to influence decisions. (c) Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future. (d) Information that is capable of making a difference in the decisions of users in their capacity as capital providers. (e) Absence of bias intended to attain a predetermined result or to induce a particular behavior.

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

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

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.

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

  1. Explain the rationale for recognizing costs as expenses at the time of product sale.
  2. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain.
  3. In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense?
  4. Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale for recognizing expenses on the basis of systematic and rational allocation of asset cost.
  5. Identify the conditions under which it would be appropriate to treat a cost as a loss.
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