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Question: Describe the major constraint inherent in the presentation of accounting information.

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Answer

Accounting information is liable to the cost constraint. Information is not beneficial till its advantages of it surpass the cost of arranging it.

Step by step solution

01

Meaning of Accounting Information

Accounting information is defined as the medium used by the entities for communicating with the internal and external parties. Users of accounting information comprise employees, shareholders, banks, creditors and government agencies.

02

Major constraint inherent in the presentation of accounting information

The major constraints on displaying accounting information include:

  • The principle of materiality indicates that only similar items should be displayed in the financial statements, but the full disclosure principle states to display all the considerable items in the financial statements.
  • The principle of timeliness states that every bit of information is to be given time, whether the information is accurate or not.
  • The principle of cost-benefit analysis indicates that each element of the accounting record must be identified by its cost and advantage, but the inspection of cost-benefit becomes tedious when the element cannot be evaluated.
  • Another constraint of accounting information is industry practices, as industry practices occasionally do not tally with the accounting principles.

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Most popular questions from this chapter

Question: Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) within the main body of the financial statements, (b) in the notes to the financial statements, or (c) as supplementary information.

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.

What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below?

(a) Target was involved in litigation over the last year. This litigation is disclosed in the financial statements.

(b) Target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets.

(c) Target records the purchase of a new Dell PC at its cash equivalent price.

Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the text under the expense recognition principle. Indicate the basic nature of each of these expense recognition methods and give two examples of each.

Identify which basic principle of accounting is best described in each item below.(a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.(b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.(d) Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

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