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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’ 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 – 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 – 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 – The comparability helps the companies to compare the results of the company from time to time.

05

Explanation for (d)

Neutrality – 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 – 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 – The accounting information must be relevant, and the information must be able to make predictions based on past events.

08

Explanation for (g)

Comparability – 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 – Verifiability means the financial statements must be verifiable, and the results must be consistent.

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

Understandability – 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 – 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 – The company must record all the business transactions without hiding any information from the financial statements.

11

Explanation for (j)

Relevance and Faithful representation – 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 – 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

Identify which basic assumption of accounting is best described in each item below.

a)The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports.

b)Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.

c)Walgreen Co. reports current and non-current classifications in its balance sheet.

d)The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.

In January 2018, Jane way Inc. doubled the amount of its outstanding stock by selling on the market an additional 10,000 shares to finance an expansion of the business. You propose that this information be shown by a footnote on the balance sheet as of December 31, 2017. The president objects, claiming that this sale took place after December 31, 2017, and therefore should not be shown. Explain your position.

E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

  1. Fair value changes are not recognized in the accounting records.
  2. Financial information is presented so that investors will not be misled.
  3. Intangible assets are amortized over periods benefited.
  4. Agricultural companies use fair value for purposes of valuing crops.
  5. Each enterprise is kept as a unit distinct from its owner or owners.
  6. All significant post-balance-sheet events are disclosed.
  7. Revenue is recorded when the product is delivered.
  8. All important aspects of bond indentures are presented in financial statements.
  9. Rationale for accrual accounting.
  10. The use of consolidated statements is justified.
  11. Reporting must be done at defined time intervals.
  12. An allowance for doubtful accounts is established.
  13. Goodwill is recorded only at time of purchase.
  14. A company charges its sales commission costs to expense

Question: The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting.

  1. Business reporting should exclude information outside of management’s expertise or for which management is not the best source, such as information about competitors.
  2. Management should not be required to report information that would significantly harm the company’s competitive position.

  3. Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast themselves the company’s financial future.

  4. Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business.

  5. Companies should present certain elements of business reporting only if users and management agree they should be reported- a concept of flexible reporting.

  6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.

Instructions

For each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting.

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.

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