E2.4 ( Identify the appropriate qualitative characteristic(s) to be used given the information
provided below. Comparability.
a. Qualitative characteristic being displayed when companies in the same industry Confirmatory Value.
are using the same accounting principles.
b. Quality of information that confirms users' earlier expectations. Comparability (Consistency.)
c. Imperative for providing comparisons of a company from period to period.
d. Ignores the economic consequences of a standard or rule. Neutrality.
e. Requires a high degree of consensus among individuals on a given
measurement. Verifiability.
f. Predictive value is an ingredient of this fundamental quality of information. Relevance
g. Four qualitative characteristics that enhance both relevance and faithful
representation. Comparability, Verifiability, Timeliness and Understandability
h. An item is not reported because its effect on income would not change a
decision. Materiality.
i. Neutrality is a key ingredient of this fundamental quality of accounting
information. Relevance and Faithful representation
j. Two fundamental qualities that make accounting information useful for decision making purposes.
Relevance and Faithful representation
k. Issuance of interim reports is an example of what enhancing ingredient? Timeliness.
CA2.2
a. Identify and discuss the benefits that can be expected to be derived from the Conceptual
Framework
ANS: The situation is avoided whereby standards are developed on a patchwork basis, where
aparticular accounting problem is recognized as having emerged, and resources were
thenchanneled into standardization.b)As stated above, the development of certain standards
(particularly national standards)have been subject to considerable political interference from
interested parties. Wherethere is a conflict of interest between user groups on which policies to
choose, policiesderiving from a conceptual framework will be less open to criticism that the
standard-setter buckled to external pressure.c)Some standards may concentrate on the income
statement whereas some may concentrateon the valuation of net assets (statement of financial
position)
(a) FASB’s Conceptual Framework should provide benefits to the accounting community such as:
(1) guiding the FASB in establishing accounting standards on a consistent basis.
(2) determining bounds for judgment in preparing financial statements by prescribing the nature,
functions and limits of financial accounting and reporting.
(3) increasing users’ understanding of and confidence in financial reporting.
b. What is the most important quality for accounting information as identified in the Conceptual
Framework? Explain why it is the most important
ANS: The most important quality for accounting information is usefulness for decision making.
Assumption is that users need reasonable knowledge of business and financial accounting matters to
understand the information.
(b) The most important quality for accounting information is usefulness for decision making. Relevance
and faithful representation are the primary qualities leading to this decision usefulness. Usefulness is
the most important quality because, without usefulness, there would be no benefits from information
to set against its costs.
c. Briefly discuss the importance of any three of the fundamental qualitative characteristics or
enhancing qualities of accounting information.
(c) There are a number of key characteristics or qualities that make accounting information desirable.
The importance of three of these characteristics or qualities is discussed below.
(1) Understandability—information provided by financial reporting should be comprehensible to those
who have a reasonable understanding of business and economic activities and are willing to study the
information with reasonable diligence. Financial information is a tool and, like most tools, cannot be of
much direct help to those who are unable or unwilling to use it, or who misuse it.
(2) Relevance—the accounting information is capable of making a difference in a decision by helping
users to form predictions about the outcomes of past, present, and future events or to confirm or
correct expectations (including is material).
(3) Faithful representation—the faithful representation of a measure rests on whether the numbers and
descriptions matched what really existed or happened, including completeness, neutrality, and free
from error.