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QUESTIONS
1. What is the meaning of qualitative characteristics of financial information?
Qualitative characteristics are the qualities or attributes that make financial accounting information useful to the users. 2. What are fundamental qualitative characteristics? Relevance and Faithful presentation 3. What are the two fundamental qualitative characteristics? Relevance and Faithful presentation 4. Explain the most efficient and effective process of applying the fundamental qualitative characteristics. First, identify an economic phenomenon or transaction that has the potential to e useful. Second, identify the type of information about the phenomenon or transaction that would be most relevant and can be faithfully represented. Third, determine whether the information is available. 5. Explain the relevance. Relevance is the capacity of the information to influence a decision. To be relevant, the financial information should be related or pertinent to the economic decision. 6. What re the two ingredients of relevance? Predictive value and Confirmatory value 7. Explain predictive value. Predictive value is can be used as an input to processes employed by users to predict future outcome. 8. Explain confirmatory value. Confirmatory value provides feedback about previous evaluations. Also, when it enables users confirm or correct earlier expectations. 9. When is an item material? An item is material if knowledge of it could reasonably affect or influence the economic decision of the primary users of the financial statements. 10. Explain the new definition of materiality. Information is material if omitting, misstating or obscuring it could reasonably expect to influence the economic decisions that primary users of general-purpose financial statements make on the basis of those statements which provide financial information about a specific reporting entity. 11. What are the factors that may be considered in determining materiality? Size and nature 12. Explain the fundamental qualitative characteristics of faithful representation. Faithful representation means that financial reports represent economic phenomena or transactions in words and numbers. 13. What are three ingredients of faithful representation? Completeness, neutrality, and free from error 14. Explain completeness of financial information. Completeness requires that relevant information should be presented in a way that facilitates understanding and avoids erroneous implications. 15. What is the standard of adequate disclosure? The standard of adequate disclosure means that all significant and relevant information leading to the preparation of financial statements shall be clearly reported. 16. Explain notes to financial statements in relation to completeness of financial information. To be complete, the financial statements shall be accompanied by notes to financial statements. The purpose of the notes is to provide the necessary disclosures requires by Philippine Financial Reporting Standards. 17. Explain neutrality of financial information. A neutral depiction is without bias in the preparation or presentation of financial information. 18. Explain prudence. Prudence is the exercise of care and caution when dealing with the uncertainties in the measurement process such that assets or income are not overstated and liabilities or expenses are not understated. 19. Explain conservatism. Conservatism means that when alternatives exist, the alternative which has the least effect on equity should be chosen. 20. Explain free from the error financial information. Free from the error means there are no errors or omissions in the description of the phenomenon of the transaction. 21. Explain the effect of measurement uncertainty to usefulness of financial information. The use of reasonable estimate is an essential part of providing financial information and does not undermine the usefulness of the financial information. As long as the estimate is clearly and accurately described and explained, even a high level of measurement uncertainty does not affect the usefulness of the financial information. 22. Explain the concept of substance over form. Faithful representation inherently represents the substance of an economic phenomenon or transaction rather than merely representing the legal form. Substance over form is not considered a separate component of faithful representation because it would be redundant. 23. What are enhancing qualitative characteristics? The enhancing qualitative characteristics are intended to increase the usefulness of the financial information that is relevant and faithfully represented. 24. Enumerate the four enhancing qualitative characteristics? Comparability, understandability, verifiability, and timeliness 25. Explain comparability. Comparability means the ability to bring together for the purpose of noting points of likeness and difference. 26. Explain comparability within a single entity. Comparability within an entity is the quality if information that allows comparisons within a single entity through time or from one accounting period to the next. 27. Explain comparability between and across entities. Comparability between and across entities is the quality of information that allows comparisons between two or more entities engaged in the same industry. 28. Explain consistency. In a broad sense, consistency refers to the use of the same method for the same item, either from period to period within an entity or in a single period across entities. In a limited sense, consistency is the uniform application of accounting method from period to period within an entity. 29. Distinguish consistency from comparability. Comparability is the goal and consistency help to achieve that goal. Consistency is the uniform application of accounting method from period to period within an entity. On the other hand, comparability is the uniform application of accounting method between and across the entities in the same industry. 30. Explain understandability. Understandability requires that financial information must be comprehensive or intelligible if it is to be most useful. An essential quality of the information provided in financial statements is that it is readily understandable by users. 31. Explain verifiability. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithfully representation. Verifiability implies consensus. 32. Distinguish direct verification and indirect verification. Direct verification means verifying an amount or other representation through direct observation, for example, by counting cash. Indirect verification means checking the inputs to a model, formula or other technique and recalculating the inputs using the same methodology. 33. Explain the timeliness. Timeliness means that financial information must be available or communicated early enough when a decision is to be made. Relevant and faithfully represented financial information furnished after a decision is made is useless or of no value. 34. Explain cost constraint on useful financial information.