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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

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

Revenues, gains, and investments by owners are all increasing in net assets. What are the distinctions among them?

Question: (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the 鈥済round floor鈥� of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/party items.

You have told Uncle Carlos that, unless you can take a look at Neville鈥檚 financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville鈥檚 most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240.

The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available.

Instructions

Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful.

(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.

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.
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