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.
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.
The two fundamental qualitative characteristics of financial reports are relevance and faithful representation. The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability.
Relevance and faithful representation remain as the two fundamental qualitative characteristics. The four enhancing qualitative characteristics continue to be timeliness, understandability, verifiability and comparability.
Relevance and faithful representation are the fundamental qualitativeattributes contributing to making the accounting information useful in decision-making.
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.
In order to be useful, financial information must be both relevant and faithfully represented. Comparability, verifiability, timeliness and understandability are identified as enhancing qualitative characteristics.
Qualitative characteristics of accounting information that must be present for information to be useful in making decisions: Relevance. Representational faithfulness.
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.
What makes a financial statement useful? FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
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. Each of these qualitative characteristics will be considered below.
Comparability, verifiability, timeliness, and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.
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.
The fundamental qualitative characteristics are relevance and faithful representation. Relevant financial information is capable of making a difference in the decisions made by users.
There are five elements of a financial statement: Assets, Liabilities, Equity, Income, and Expenses. Each of these categories has its own unique set of information that is important to track for a business.
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
Some examples of quantitative information in accounting include: Financial statements with numbers for revenue, expenses, assets, liabilities, etc. Financial ratios like profit margin, return on assets, debt-to-equity ratio, etc. Growth rates and trends over time.
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.
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