Qualitative Characteristics Flashcards
What are the two Qualitative Characteristics in Accounting?
The two Qualitative Characteristics in Accounting are Relevance and Faithful Representation.
What makes information relevant?
It must have Predictive Value and Confirmatory Value.
What is the characteristic of Predictive Value?
It can be used to make predictions about the future, plan budgets, etc.
What is the characteristic of Confirmatory Value
It can be used to provide feedback on past performance or trend.
What is materiality
Materiality states that information that will influence decisions due to its amount or nature must be disclosed.
What is needed for Faithful Representation
Accounting information should accurately reflect the event it represents. It must be complete, neutral and free from error.
What is being Neutral
Being Neutral is that the information is not biased, it does not present a favourable or unfavourable slant to influence users. It is free from bias and it is an arms-length transaction.
What is an arms length transaction
It is when a willing buyer and willing seller agree on a transaction price where the seller does not interfere in any way to jack up the price.
What are the Enhancing Characteristics
Understandability, Comparability, Timeliness and Verifiability.
What is the definition of enhancing Qualitative Characteristics
Any information that can improve the Relevance or Faithful Representation of the Financial Statements.
Define and give an example of Understandability
Accounting information should be presented in a way that is easily comprehended by those making use of them.
Define and give an example of Comparability
It must be possible to use accounting information to compare accounting periods to measure performance/ make trend analyses/ show similarities and differences. It should also be possible to us the information to make comparisons with similar businesses.
Define and give an example of Timeliness
Information needs to be available in time to influence users’ decisions.
Define and give an example of Verifiability
When information is verifiable, it assures users that the information faithfully represents the account, event or transaction it represents. Different independent users will reach a consensus that the information is accurate.
What are the two constraints on relevant information
The two constraints on relevant information are timeliness as late financial information as information can be of little use if it is out of date. The other constraint is cost-benefit, the benefits from reporting the information should outweigh the costs required to provide and use that information.
