Qualitative Characteristics Flashcards
What are the two Qualitative Characteristics in Accounting?
Relevance and Faithful Representation
What makes information relevant?
Predictive Value, and Confirmatory Value
What is the characteristic of predictive value?
Can be used to make predictions about the future, e.g. plans and budgets
What is the characteristic of confirmatory value?
Provides feedback on past performance or trends
What is materiality?
Information that will influence decisions due to its amount or nature must be disclosed.
What is needed for faithful representation?
Information should reflect accurately the event it represents. It must be complete, neutral, and free from error
“Arms-length transaction” means..?
Willing buyer and a willing seller agree on a transaction price (no bias)
What is the definition of enhancing qualitative characteristics?
Any information that can improve the relevance or faithful representation of the financial statements.
What are the enhancing qualitative characteristics?
Comparability, Verifiability, Timeliness, and Understandability
Define and give an example of Understandability
Information should be presented in a way that is easily comprehended, e.g. condensing a whole shop’s inventory into just one ledger “Inventory”
What are the two constraints on relevant information?
Timeliness can constrain the relevance of information. Information that is out of date is useless to decision makers, yet to report up-to-date information would require reporting incomplete information. This would damage the reliability of the financial statements.
Cost-benefit is the next constraint: the benefits from reporting the information should always outweigh the costs required to provide and use the information.
