Question

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

(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

Meaning of Accounting Information

Accounting information provides beneficial and important information about the transactions and events of the business entity.

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.

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.

Explanation for (c)

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

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.

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.

Explanation for (f)

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

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.

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.

Explanation for (i)

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

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.

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.