Chapter 2 - Financial Statements Continued Flashcards
Relevance
Information will make a difference in a users’ decision.
-Predictive Value
-Confirmatory Value
-Materiality
Predictive Value
Information helps us make predictions about future events. A characteristic of relevance.
Confirmatory Value
Information helps users confirm or correct their previous predictions or expectations. A characteristic of relevance.
Materiality
Omission or mistreatment of information could influence users’ (Eg. investors, creditors) decisions. A characteristic of relevance.
Faithful Representation
Information is representative of economic reality.
-Complete
-Neutral
-Free of Material Error
Complete
Nothing important was omitted from financial statement. A characteristic of faithful representation.
Neutral
Financial statement is not biased toward one position or another. A characteristic of faithful representation
Free from material error
A characteristic of faithful representation.
Comparability
Identify and understand similarities and differences. Similar companies should apply the same accounting principles for similar events for every accounting period.
Verifiability
Independent consensus can be reached. If two accountants create a financial statement for the same company, the financial statements should be the same.
Timeliness
Information is available before it loses its usefulness. Financial statements need to be released in a certain period of time (eg. quarterly)
Understandability
Information is classified, characterized and presently clearly and concisely. Financial statement does not attempt to hide any information.
Going Concern Assumption
Assumes a company will continue in operation for the foreseeable future.
Cost Benefit/Cost Constraint
Ensures that the value of the information is greater than the cost of providing it.
