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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Financial accounting and reporting provide information that is useful for resource allocation decisions. In Statement of Financial Accounting Concepts No. 8, Chapter 1, “The Objective of General Purpose Financial Reporting,” the FASB rand the [ASH defined the following basic objectives of financial reporting:

Financial reporting should provide understandable information to present and potential investors, lenders, and other creditors:

  • that is useful in making rational capital allocation decisions
  • that facilitates assessing the amounts, timing, and uncertainty' related to the company’s cash flows
  • that is informative about the company’s economic resources, its claims to those resources, and the changes in its resources and obligations occurring from earnings and other operating activities

The qualitative characteristics of useful accounting information were identified in the FASB’s and the IASB’s Statement of Financial Accounting Concepts No. 8 Chapter 3, “Qualitative Characteristics of Useful Accounting Information”. These characteristics distinguish better information (more useful) from inferior information (less useful).

Required:

1. For the primary quality relevance, (a) define relevance and (b) explain the meaning and importance of each of the three ingredients of relevance.

2. For the primary quality faithful representation, (a) define faithful representation and (b) explain the meaning and importance of each of the three ingredients of faith fill representation.

3. Describe how relevance and faithful representation should be applied to determine useful accounting information.

4. Explain the following enhancing characteristics:

  1. a. comparability (including consistency)
  2. b. verifiability
  3. c. timeliness
  4. d. understandability

5. Explain the cost constraint.

1.

To determine

Define the term relevance and also explain the meaning and the importance of the three ingredients of relevance.

Explanation

Accounting Information: Accounting information helps in measuring and communicating economic events in business. Accounting concepts and accounting information guides the enterprise in managing the business activities and helps in monitoring the method of invest the money and receiving money.

Relevance: Accounting information is considered to be relevant, if it’s capable of making   difference between the decision made by the financial statement users, because the information provided in the accounting information will be considered different if it helps the users to predict the future outcomes and if is material in nature and amount. The characteristics relevant accounting information is given below:

  • Predictive Value:  The predictive value is the net income value which helps the user to predict the future cash flows of the company. The financial information will have predictive value only when it is used as an input as to process the future outcomes.
  • Confirmatory value: The Confirmatory value is the net income value which helps the investors to assess the future cash flows of the company...

2.

To determine

Define the term faithful representation and also explain the meaning and the importance of the three ingredients of faithful representation.

3.

To determine

State the way by which relevance and the faithful representation should be applied to ascertain the usefulness of the accounting information.

4.

To determine

Explain the enhancing characteristics for the items given below:

a. Comparability

b. Verifiability

c. Timeliness

d. Understandability

5.

To determine

Explain the concept cost constraint.

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