Q2E - Intermediate Accounting (Kieso)

Question

E2-2 (L01,2,3) (Usefulness, Objective of Financial Reporting, Qualitative Characteristics) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position. 

 

1. The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. 
2. Relevant information only has predictive value, confirmatory value, or both.
3. (c) Information that is a faithful representation is characterized as having predictive or confirmatory value. 
4. Comparability pertains only to the reporting of information in a similar manner for different companies. 
5. Verifiability is solely an enhancing characteristic for faithful representation. 
6. In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

Step-by-Step Solution

Answer

1. False.
2. False
3. False
4. False
5. False
6. True

Step 1: Meaning of Conceptual Framework

The conceptual framework is a system of fundamentals that helps the Board set up of the accounting standards.

Step 2: Explanation for statement (a)

• The given statement is False.
• Relevance and faithful representation are the fundamental qualitative attributes contributing to making the accounting information useful in decision-making.

Step 3: Explanation for statement (b)

• The given statement is False.
• Relevant representation means that the information has confirmatory and predictive value and is also material.

Step 4: Explanation for statement (c)

• The given statement is False.
• Faithful representation means that the information is free from bias, complete, error-free, or accurate.

Step 5: Explanation for statement (d)

• The given statement is False.
• Comparability means that the information is measured and reported similarly for different companies.

Step 6: Explanation for statement (e)

• The given statement is False.
• Verifiability means that the independent sources arrive at similar results using the same methods. For example, inventory count by two different auditors for the same company for a given period gives the same count.

Step 7: Explanation for statement (f)

• The given statement is true.
• Preparation of financial reports assumes that the readers have sufficient knowledge about the business and its economic activities.