07. Objectives & Qualitative Characteristics Flashcards
What are the primary qualitative characteristics of financial information?
Faithful representation and relevance (FARR)
What are the ingredients of relevance?
Predictive value
Confirmatory value
Materiality
What is predictive value?
To be relevant, accounting information should assist financial statement users in making predictions about future events.
What is confirmatory value?
To be relevant, accounting information should assist decision makers in confirming past predictions.
What are the ingredients of faithful representation?
What is completeness?
What does it mean to be free from error?
Information is free from error if it is truthful.
What is neutrality?
To be neutral, accounting information must be free of bias
List the enhancing qualitative characteristics of financial information.
Comparability
Verifiability
Timeliness
Understandability
What is comparability?
The quality of information that enables users to identify similarities and differences between sets of information.
What is verifiability?
Information is verifiable if different knowledgeable and independent observers can reach similar conclusions.
What is timeliness?
To be relevant, accounting information must be received in time to make a difference to the decision maker.
What is understandability?
Information is understandable if the user comprehends it with reasonable effort and diligence.
What are objectives of financial reporting?
To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions
Who is the target audience of financial statements?
Decision makers; mainly potential investors, creditors, and regulators
What is completeness?
Information is complete if it includes all data necessary to be faithfully representative.
