Concept Introduction:
Conceptual framework versus cost constraint- The conceptual framework of accounting explains the objectives and concepts for reporting financial information. It helps the accountants in providing the financial information which is most useful for existing as well as potential investors, lenders and other creditors. The qualitative characteristics of useful information is divided into two categories:
- Fundamental qualitative characteristics which includes relevance and faithful representation.
- Enhancing qualitative characteristics which includes comparability,verifiability, timeliness and understandability.
However, these characteristics are subject to cost constraints, so the benefits to the users of information must justify the cost incurred by the entity.
Requirement 1:
To specify the qualitative characteristic or constraint that is most suitablewhen a financial item that may be useful to investors is not required to be reported because the cost of measuring and reporting this information is judged to be too great.
Concept Introduction:
Relevance: An information is relevant if omission or misstatement of such information can change a business decision and helps the users of information in predicting future events or confirming or correcting any past predictions.
Requirement 2:
To specify the qualitative characteristic or constraint that is most suitable when timely information that is used to predict future events or provide feedback about prior event.
Concept Introduction:
Comparability: It states that a financial information is useful if information of one company is comparable with another company’s similar information or it is comparable within same company with different time-period.
Requirement 3:
To specify the qualitative characteristic or constraint that is most suitable when a quality of information that enables an analyst to evaluate the financial performance of two different companies in the same industry.
Trending nowThis is a popular solution!
Chapter 2 Solutions
Cornerstones of Financial Accounting
- Case 1-74 Comparative Analysis: Under Armour, lnc., versus Columbia Sportswear Refer to the 10-K reports of Under Armour, Inc., and Columbia Sportswear that are available for download from the companion website at CengageBrain.com Required: Answer the following questions: What is managements assessment of each companys past performance and future prospects? Where did you find this information?arrow_forwardMULTIPLE CHOICE: 1. These users need accounting information in evaluating the stability of the business in so far as their job security, future remuneration, and career growth and opportunities are concerned. A. Employees B. Creditors C. Auditors D. Regulatory authorities 2. All of the following describe accounting describe accounting, except A. A service activity B. An information system C. A universal language of business D. An exact science rather than an art.arrow_forwardThe fundamental qualitative characteristics that financial information must possess to be useful to the primary users of general purpose financial reports—identified in the Conceptual Framework are ‘relevance’ and ‘faithful representation’.Required:a) Provide one example where information is relevant but not faithfully represented. (3 marks,maximum 100 words)b) Provide one example where information is not relevant but is faithfully represented. (3 marks,maximum 100 words)c) Provide one example where information is relevant and faithfully represented. (4 marks,maximum 150 words)Week 2a) What isarrow_forward
- Which statement is correct: Select one: a. Management accounting’s focus and emphasis is on past-oriented reports. b. The purpose of financial information in management accounting is to communicate organization's financial position to investors, banks, regulators, and suppliers. c. All statements are correct. d. Management accounting focuses on measuring, analyzing, and reporting financial and nonfinancial information to help managers estimate future revenue, costs, and other measures to forecast activities and formulate strategies to increase the competitive advantage of the organization. e. In management accounting, rules of measurement reporting require financial statements, e.g. prepared for the budgeting purpose, to be prepared in accordance of GaAAP.arrow_forwardAnswer of the following question related to these characteristics and constraints. Jeff Brown is evaluating two companies for future investment potential. Jeff’s task is made easier because both companies use the same accounting methods when preparing their financial statements. Which characteristic does the information Jeff will be using possess?arrow_forwardPROBLEM Below is a list of the qualitative characteristics identified in FASB Statement of Financial Accounting Concepts No. 2. Following the list is a series of descriptive phrases. a. feedback value b. relevance c. decision usefulness d. reliability e. comparability f. predictive value g. varifiability h. consistency i. representational faithfulness j. timeliness k. neutrality _____ 1. When information can make a difference in a decision. _____ 2. Making information available when it is needed. _____ 3. When accounting policies and procedures are unchanged from period ro period. _____ 4. When information is verifiable and neutral. _____ 5. Occurs when the measurement results can be duplicated. _____ 6. The overall qualitative characteristics accounting information should possess. _____ 7. When information enables decision makers to confirm prior expectations. _____ 8. When accounting information is reported the same way by different companies. Required: Match each characteristic…arrow_forward
- Statement 1: If financial information is to be useful, it must be relevant or faithfully represent what it purports to represent.Statement 2: Cost is a pervasive constraint on the reporting entity's ability to provide useful financial information. a Statement 1 is true, Statement 2 is false b Both are false c Both are true d Statement 1 is false, Statement 2 is truearrow_forward7. Determine the response that best completes the following statements or questions. A) The primary objective of financial reporting is to provide information. multiple choice 1 About a firm's management team. Useful to capital providers. About a firm's financing and investing activities. Concerning the changes in financial position resulting from the income-producing efforts of the entity. B) Statements of Financial Accounting Concepts issued by the FASB multiple choice 2 Represent GAAP. Identify the conceptual framework within which accounting standards are developed. Have been superseded by SFASs. Are subject to approval of the SEC. C) In general, revenue is recognized when multiple choice 3 A good or service has been delivered to a customer. The sales price has been collected. A contract has been signed. A purchase order has been received. D) In depreciating the cost of an asset, accountants are most concerned with…arrow_forward5 A conceptual framework for financial reporting is a statement of generally accepted theoretical principles, which provide the basis for __________________. i)Development of new accounting standards ii)Development of accounting staff through training programs iii)Evaluation of accounting standards which already in existence. iv)Developing quality control methods to enhance the quality of products and services. a. iii) & iv) b. ii) & iv) c. i) & iii) d. i) & ii)arrow_forward
- Conceptual Framework and Reporting Standard: Small and Medium Sized Enterprise 1. The PFRS for SMEs requires that entity’s financial statements should be prepared using an accrual basis of accounting. True of False? 2.The PFRS for SMEs states that the objective of financial statements is to provide information about the financial position, performance and cash flows of the entity that is useful for economic decision-making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs. True or False? 3. The PFRS for SMEs allows offsetting in assets and liabilities, or income and expenses. True or False?arrow_forwardAnswer True or False1. A strategic audit is done to evaluate the functional unit of the business and grades itaccording to its business alignment goals.2. Strategic Audit evaluates your current strategy by performing a Financial analysis testwhich reassesses the business strength and weakness and threats.3. A strategic audit helps assess the resources of a company whereby if your goals do notmatch with your current resources, one has to change either the business goals or eitherstretch out on the supplies available4. It is not important to perform regular strategic audits and measure implementation inorder to keep on top of shifts in the environment and ensure you are always on the rightpath.5. The most important requirement for the data used in the strategic review process is thatthey be objective. In addition, the criteria should be familiar, well-understood, andaccepted measures of financial performance6. Political variables have a significant effect on Strategy formulation and…arrow_forwardQuestion 4 a) Define the concept of research methodology in the context of accounting theory. Discuss the importance of selecting an appropriate research methodology in accounting research, highlighting the strengths and limitations of quantitative and qualitative approaches to accounting research. b) Evaluate the role of accounting theories in guiding research in the field of accounting. Discuss how different accounting theories, such as agency theory, positive accounting theory, and institutional theory, influence research questions, hypotheses formulation, and empirical analysis.arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningAccounting Information SystemsFinanceISBN:9781337552127Author:Ulric J. Gelinas, Richard B. Dull, Patrick Wheeler, Mary Callahan HillPublisher:Cengage Learning