What are the fundamental qualitative characteristics of financial statements? - Universal CPA Review (2024)
SFAC No. 2 outlines the are two primary qualitative characteristics and their components. You are expected to understand the fundamental qualitative characteristics and the enhancing characteristics. Both characteristics should be present in order for financial information to be useful to readers. The two fundamental characteristics to remember come exam day are relevance and faithful representation.
Financial information is relevant and influences financial statement readers decision making process. Financial information is considered relevant if it has predictive value, confirmatory value, and materiality.
1) Predictive value– Financial information that has predictive value can be applied to predict future information.
2) Confirmatory value – Financial information that has confirmatory value can be applied to provide information that confirms or changes previous determinations.
3) Materiality – Financial information is considered material such that if absent or omitted, it would cause a potential influence on existing or potential decisions.
Faithful Representation: Key Components
Financial information is faithfully represented if it is considered reliable to financial statement readers and alleviates doubt in their decision-making process. Financial information is considered faithfully represented if it has completeness, neutrality, and has a freedom from error.
1) Completeness – Financial statements are considered complete if it allows the user to have all information that is pertinent and necessary to coming to an appreciate decision.
2) Neutrality – Financial statements are considered neutral if they are reported without bias in the selection or the presentation of the financial information.
3) Freedom from error – Financial information is considered to be free from error when no omissions or errors have been applied when selecting reporting processes.
According to the framework, qualitative characteristics are the attributes that meet the decision usefulness of financial information. The framework listed these attributes as; relevance, faithful representation, comparability, understandability, verifiability and timeliness.
The two fundamental qualitative characteristics of financial reports are relevance and faithful representation. The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability.
Comparability, verifiability, timeliness, and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.
The fundamental qualitative characteristics of financial statements as described by the IASB conceptual framework least likely include: reliability. It includes relevance and faithful representation.
The FASB's conceptual framework identifies relevance and faithful representation as the two fundamental qualitative characteristics for financial reporting.
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
9. Prudence:- Prudence means degree of caution in exercise of judgments requires to estimate condition of uncertainty so that assets and income are not overstated and liabilities and expenses are not understated.
If financial information is to be useful then it must be relevant and must also faithfully represent what is being reported. The usefulness of this information is enhanced if it is comparable, verifiable, timely and understandable.
The selected qualitative characteristics were predictive value, feedback value, timeliness, verifiability, representational faithfulness, neutrality and comparability. An opinion survey was conducted on one hundred ninety external users specifically shareholders, stockbrokers, bankers, academicians and tax officers.
Comparability, verifiability, timeliness and understandability are identified as enhancing qualitative characteristics. They increase the usefulness of information that is relevant and faithfully represented.
The chapter explains the fundamental qualitative characteristics (relevance and faithful representation) and the enhancing qualitative characteristics (comparability, verifiability, timeliness, and understandability) of useful financial information and notes the cost constraint.
Relevance means that information has predictive or confirmatory value. That is, it helps users to predict future outcomes, for example future profits, or it can confirm or refute previous predictions. Faithful representation means a depiction which is complete, neutral and free from error.
Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. The four principal qualitative characteristics are understandability, relevance, reliability and comparability.
Relevance. Relevance refers to how helpful the information is for financial decision-making processes. For accounting information to be relevant, it must possess: Confirmatory value – Provides information about past events.
Quantitative Characteristics of Financial Statements
Quantitative financial data include numbers you can measure, such as revenue, expenses, profit margins and taxes. You can break down these numbers to further quantify areas of your financial performance.
The term “qualitative characteristics of accounting information” refers to the attributes that make the information contained infinancial statements beneficial to the users. The qualitative characteristics of accounting information include relevance, reliability, understandability, and comparability.
Fundamental accounting assumptions are the basic assumptions that accountants use in their work. They are made up of three key concepts: Concern, Consistency, and accrual basis. The fundamental accounting assumptions are the most basic assumptions made by accountants during their work.
Introduction: My name is Neely Ledner, I am a bright, determined, beautiful, adventurous, adventurous, spotless, calm person who loves writing and wants to share my knowledge and understanding with you.
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