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Chapter 2: Question 3Q (page 61)

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

Short Answer

Expert verified

The term 鈥渜ualitative characteristics of accounting information鈥� refers to the attributes that make the information contained infinancial statements beneficial to the users. The qualitative characteristics of accounting information include relevance, reliability, understandability, and comparability.

Step by step solution

01

Definition of “qualitative characteristics of accounting information”.

Qualitative characteristics of accounting information are the qualities that allow the users of financial information to comprehend and make decisions on financial reports more easily.

In the absence of these qualitative characteristics, the accounting information would be vague and not presented in an orderly manner.

02

Types of “qualitative characteristics of accounting information”

There are basically four types of qualitative characteristics of accounting information. They are:

  • Relevance: The term relevance here means that the relevant information must be timely predictable, assist users in providing feedback, and positively influence their decisions.
  • Reliability: The term reliability means that the users must be able to rely on the information provided to them. For this purpose, the information provided to them must be free from any bias, and it should also be accurate.
  • Understandability: Understandability in accounting information means that the users must be able to comprehend the information in the same manner as it is conveyed to them.
  • Comparability: The term comparability here mean that accounting information must be comparable. The users of the general-purpose reports must be able to compare different aspects of entities over different time periods and with other entities.

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Most popular questions from this chapter

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

(Elements of Financial Statements) Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below.

Assets Distributions to owners Expenses Liabilities Comprehensive Income Gains Equity Revenues Losses Investments by owners

Instructions

Identify the element or elements associated with the 12 items below.(a) Arises from peripheral or incidental transactions.

(b) Obligation to transfer resources arising from a past transaction.

(c) Increases ownership interest.

(d) Declares and pays cash dividends to owners.

(e) Increases in net assets in a period from nonowner sources.

(f) Items characterized by service potential or future economic benefit.

(g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

(h) Arises from income statement activities that constitute the entity鈥檚 ongoing major or central operations.

(i) Residual interest in the assets of the enterprise after deducting its liabilities.

(j) Increases assets during a period through sale of product.

(k) Decreases assets during the period by purchasing the company鈥檚 own stock.(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

Question: BE2-5 (L03) Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material.(

a) Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net income.

(b) Hindi Co. has an unusual gain of \(3.1 million on the sale of plant assets and a \)3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Hindi Co.'s income for the current year was \(10 million.

(c) Damon Co. expenses all capital equipment under \)25,000 on the basis that it is immaterial. The company has followed this practice for a number of years.

Mogilny Company paid \(135,000 for a machine. The Accumulated Depreciation- Equipment account has a balance of \)46,500 at the present time. The company could sell the machine today for $150,000. The company president believes that the company has a 鈥渞ight to this gain.鈥� What does the president mean by this statement? Do you agree?

(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.
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