1.6 Qualitative Characteristics of Useful Financial Information

Question 1

Identify the 2 fundamental qualitative characteristics

Answer 1

• relevance

- faithful representation

Question 2

Define relevance

HINT: Relevance Predicts or Confirms Materiality

Answer 2

• makes a difference in user decisions

- must have predictive value, confirmatory value or both

Question 3

When is information considered to have predictive value?

Answer 3

if it can be used as an input in a predictive process

Question 4

When is information considered to have confirmatory value?

Answer 4

if it provides feedback that confirms or changes (corrects) prior evaluations

Question 5

Define materiality

Answer 5

omission or misstatement can influence user decisions based on a specific entity’s info

Question 6

Define faithful representation

Answer 6

useful information faithfully represents economic events

Question 7

Identify the characteristics of faithful representation

HINT: a faithful representation is Complete, Neutral and Free from error

Answer 7

• Completeness
• Neutrality
• Freedom from error

Question 8

Define “Completeness” as a characteristic of faithful representation

Answer 8

containing what is needed for user understanding

Question 9

Define “Neutrality” as a characteristic of faithful representation

Answer 9

unbiased in its selection and presentation

Question 10

Define “Freedom from Error” as a characteristic of faithful representation

Answer 10

• no errors or omissions in descriptions of the phenomena (fact or observable occurrence) or selection and application of the reporting process
• does not mean it is perfectly accurate

Question 11

Define the concept of “substance over form” & provide an example

Answer 11

• guides accountants to present the financial reality of a transaction, not merely its legal form
• Example: Consolidation of a legally separate subsidiary by a parent

Question 12

Identify the 3 step process for applying the fundamental qualitative characteristics

Answer 12

• identify useful info to users of financial reports
• identify relevant info
• determine if info is available and can be faithfully represented

Question 13

What do enhancing qualitative characteristics do?

Answer 13

enhance the usefulness of relevant and faithfully represented information

Question 14

Identify the enhancing qualitative characteristics of financial information

HINT: Every Coach Values Team Unity

Answer 14

• Enhancing
• Comparability
• Verifiability
• Timeliness
• Understandability

Question 15

Define “Comparability” as an enhancing qualitative characteristic

Answer 15

• info s/b comparable with similar information for other entities and the same entity for another period or date
• allows users to understand similarities and differences

Question 16

How is comparability achieved in financial reporting?

Answer 16

by consistently using the same methods (accounting principles) for the same items over time

Question 17

Define “Verifiability” as an enhancing qualitative characteristic & provide an example

Answer 17

• Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (not necessarily unanimity) that it is faithfully represented.
• Example: an arm’s length transaction between 2 independent parties suggests verifiability

Question 18

Define “Timeliness” as an enhancing qualitative characteristic

Answer 18

Information is timely when it is available in time to influence decisions.

Question 19

Define “Understandability” as an enhancing qualitative characteristic

Answer 19

• information is clearly and concisely classified, characterized, and presented.
• Information should be readily understandable by reasonably knowledgeable and diligent users but should not be excluded because of its complexity

Question 20

Identify the qualitative characteristics of state and local governments

HINT: Cut Costs To Utilize Real Returns

Answer 20

• cost benefit limitations
• comparability
• timeliness
• understandability
• reliability
• relevance

Question 21

What does “pervasive” mean?

Answer 21

spread widely throughout an area or group of people