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.
The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability. The characteristic of relevance implies that the information should have predictive and confirmatory value for users in making and evaluating economic decisions.
Comparability, verifiability, timeliness, and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.
Comparability, verifiability, timeliness and understandability are identified as enhancing qualitative characteristics. They increase the usefulness of information that is relevant and faithfully represented.
On the other hand, (Needles, 2001) [5], mentions that according to SFAC (Statements of Financial Accounting Concepts) developed by the FASB (Financial Accounting Standards Board), the most important qualitative characteristics of accounting information are clarity and usefulness; and for that information to fulfill the ...
(fʌndəmentəl ) adjective [usually ADJECTIVE noun] You use fundamental to describe things, activities, and principles that are very important or essential. They affect the basic nature of other things or are the most important element upon which other things depend.
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.
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 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.
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.
The two fundamental characteristics to remember come exam day are relevance and faithful representation. Relevance: Key Components. Financial information is relevant and influences financial statement readers decision making process.
The overriding qualitative characteristic of accounting information is usefulness for decision making. Briefly describe the two fundamental qualities of useful accounting information: Relevance and faithful representation are the two primary qualities of useful accounting information.
Materiality is a concept that determines whether the omission or misstatement of information in a financial report would impact a reasonable user's decision-making. If information is significant, it is material. If the information is insignificant or irrelevant, it is said to be immaterial.
It is a principle of accounting but not the part of qualitative characteristics because it helps the company to make decisions by considering all factors. Hence, (a) Materiality is the correct option.
Relevance. The financial statements must contain relevant information for them to be useful to the users. For such users, any information that helps their decision making about investing is useful information. Such information should help them evaluate past, present or even future events.
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 Van Hayes, I am a thankful, friendly, smiling, calm, powerful, fine, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
