Qualitative Characteristics Flashcards
What are the two Qualitative Characteristics in Accounting?
Relevance and Faithful Representation
What makes information relevant?
Predictive Value and or 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 provides feedback on past performance or trends
What is Materiality?
Materiality states that information that will influence decisions due to its amount of nature must be disclosed. Its omission or misstatement could influence decision. This makes it possible to expense small items
What is needed for Faithful Representation?
Accounting information should reflect accurately the event it represents. It must be complete, neutral, and free from error
Define “Complete”
Complete all the necessary explanations are provided so the information can be understood
Define “Neutral”
The information is not biased. It does not present a favourable or unfavourable slant to influence users.
“Free from bias”
“Arms Length Transaction”- Willing Buyer + Willing Seller agrees on a transaction price eg. TradeMe
Define “Free from error”
Means there are no errors or omissions from the descriptions of the information, not that it is necessarily 100% accurate
What are 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 the information eg Easy to understand Terminology
Define and give an example of “Comparability”
Must be possible to use accounting information to compare accounting periods to measure performance/ make trends/ show similarities and differences. It should be able to be possible to use 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 of transaction it represents. Different independent users will reach a consensus that the information is accurate
What are the two constraints on relevant information?
Time and Money
