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Chapter 2: Question 8Q (page 61)

What is the distinction between comparability and consistency?

Short Answer

Expert verified

The difference between comparability and consistency is that comparability refers to the method of comparing two or more companies according to their position. On the other hand, consistency is defined as the similarity in policies and procedures of a firm, which aids the users in comparing the financial statements of a specific accounting period.

Step by step solution

01

Meaning of Accounting Principles

Accounting principles refer to the rules and principles that the company must adhere to while reporting the financial data in the accounting reports. It escorts the companies the way to record theaccounting transactions in the books of accounts.

02

Difference between Comparability and Consistency

Comparability and consistency differ from each other on the following grounds:

  • Comparability provides comparisons between information about two different enterprises at a certain point in time. Whereas consistency is a type of comparability that assists in comparisons between information about the same firm at two different time periods.
  • Comparability is the qualitative characteristic that helps users to recognize and understand similarities and differences among items. However, consistency is defined as adopting the same methods for the same items in different accounting periods with a reporting organization.
  • In comparability, the quality of information is compared between two or more companies. On the other hand, in the case of consistency, the quality of informationis compared within a single organization from one accounting period to the other.

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Most popular questions from this chapter

Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation鈥擝uildings 60,000

b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.

Inventory 21,000

Gain on Inventories 21,000

c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

Equipment 135,000

Common Stock 135,000

d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

Accounts Receivable 61,500

Sales Revenue 61,500

Describe the basic assumptions of accounting.

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?

What is the primary objective of financial reporting?

The chairman of the company鈥檚 board of directors for which you are the chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of directors than 鈥渙ut-of-date costs.鈥� Present some arguments to convince him that accounting data should still be based on historical cost.
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