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Chapter 2: Q4E (page 66)

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?

Short Answer

Expert verified

(a)Comparability

(b)Confirmatory value

(c) Comparability

(d) Neutrality

(e) Verifiability

(f) Relevance

(g) Comparability, Verifiability, Timeliness, Understandability

(h) Materiality

(i) Faithful representation

(j) Relevance and faithful representation

(k) Timeliness

Step by step solution

01

Meaning of Accounting Information

Accounting information provides beneficial and important information about the transactions and events of the business entity.

02

Explanation for (a)

Comparability 鈥� When companies are using the same type of accounting principles to prepare financial statements, it becomes easy for the companies to compare them within the same type of industry.

03

Explanation for (b)

Confirmatory value 鈥� It means the information provides feedback on the earlier evaluations and helps the users confirm or change the options based on the earlier expectations.

04

Explanation for (c)

Comparability 鈥� The comparability helps the companies to compare the results of the company from time to time.

05

Explanation for (d)

Neutrality 鈥� It means that the company must prepare financial statements so that there should be unbiased financial statements irrespective of the consequences that may arise because of the unbiased financial statements.

06

Explanation for (e)

Verifiability 鈥� The financial information must be verifiable. The same results should come even if the company accounts prepare financial statements or external auditors prepare financial statements. The individuals must draw the same opinions and have a consensus about the measurements.

07

Explanation for (f)

Relevance 鈥� The accounting information must be relevant, and the information must be able to make predictions based on past events.

08

Explanation for (g)

Comparability 鈥� The comparability helps the companies to compare from time to time the profits from one year to another year or compare the results from other companies.

Verifiability 鈥� Verifiability means the financial statements must be verifiable, and the results must be consistent.

Timeliness 鈥� The information must reach the accounting team quickly so the business entity can make the required timely decisions quickly and accurately.

Understandability 鈥� The financial statements must be clear and easy to understand. Decision-makers make accurate decisions based on the financial statements.

09

Explanation for (h)

Materiality 鈥� Materiality means that even if the items related to materials are included or excluded, that does not affect the decisions of the business.

10

Explanation for (i)

Faithful representation 鈥� The company must record all the business transactions without hiding any information from the financial statements.

11

Explanation for (j)

Relevance and Faithful representation 鈥� The accounting information must be relevant and should be able to compare the results from one year to another year. The information must be presented in an unbiased manner without hiding any information.

12

Explanation for (k)

Timeliness 鈥� The accounting information must be able to make effective decisions from time to time. Interim reports help the company to make timely decisions.

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Most popular questions from this chapter

Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service

(Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mentionof these facts was made in the financial statements and the related notes.

Instructions

Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.

(a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted.

(b) Equipment purchases of \(170,000 were partly financed during the year through the issuance of a \)110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at \(60,000.

(c) Weller has reported its ending inventory at \)2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.

(d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.

Briefly describe the fair value hierarchy.

(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: William Murray achieved one of his life-long dreams by opening his own business, The Caddie Shack Driving Range, on May 1, 2017. He invested \(20,000 of his own savings in the business. He paid \)6,000 cash to have a small building constructed to house the operations and spent \(800 on golf clubs, golf balls, and yardage signs. Murray leased 4 acres of land for \)1,000 per month. (He paid the first month鈥檚 rent in cash.) During the first month, advertising costs totaled \(750, of which \)150 was unpaid at the end of the month. Murray paid his three nephews \(400 for retrieving golf balls. He deposited in the company鈥檚 bank account all revenues from customers (\)4,700). On May 15, Murray withdrew \(800 in cash for personal use. On May 31, the company received a utility bill for \)100 but did not immediately pay it. On May 31, the balance in the company bank account was \(15,100.

Murray is feeling pretty good about results for the first month, but his estimate of profitability ranges from a loss of \)4,900 to a profit of \(1,650.

Accounting

Prepare a balance sheet at May 31, 2017. Murray appropriately records any depreciation expense on a quarterly basis. How could Murray have determined that the business operated at a profit of \)1,650? How could Murray conclude that the business operated at a loss of \(4,900?

Analysis

Assume Murray has asked you to become a partner in his business. Under the partnership agreement, after paying him \)10,000, you would share equally in all future profits. Which of the two income measures above would be more useful in deciding whether to become a partner? Explain.

Principles

What is income according to GAAP? What concepts do the differences in the three income measures for The Caddie Shack Driving Range illustrate?
See all solutions

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