Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000. Show
From the above, answer the following : The purpose of financial statements is to give financial statements information about the change in financial position, financial performance and financial position of the organization. These can provide data use in decision making such as investment, credit and economic decision making which are useful for various users. There are seven main groups of users which are public, investors, lenders, employees, customers, supplies, government and other agencies and the needs of information is different for each group, for instance, employee will interest on the profitability, retirement benefits and employment opportunities and so on. The qualitative characteristics can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. However, it can limited by two pervasive constraints which is cost and materiality in providing useful financial information. Fundamental Qualitative Characteristics of Financial Information
Application of the Fundamental Qualitative Characteristics of Financial InformationRelevance is the fundamental qualitative characteristic which connected to the economic phenomena and must be considered first before the other qualitative characteristics. Once the relevance is applied to distinguish which economic phenomena should be presented, faithful representation is going to determine which characteristics are best to correspond to the relevant phenomena. Therefore, relevance and faithful representation must work in a line to provide useful financial information to the users. Enhancing Qualitative Characteristics of Financial InformationEnhancing qualitative characteristics are additional benefit added to the fundamental to enhance the decision usefulness of financial information.
Application of the Enhancing Qualitative Characteristics of Financial InformationEnhancing qualitative characteristics provide additional benefit and usefulness in the financial reporting information. Therefore, the four important characteristics which are comparability, verifiability, timeliness and understandability should be extent widely. However, the enhancing qualitative characteristics will be useless if the financial information is irrelevant or not faithfully represented in fundamental step. The application of the enhancing qualitative characteristics is redundant process that does not follow priority and prescribed order. Sometimes, one or some of the enhancing qualitative characteristics will be given up to maximize the usefulness of another qualitative characteristic. If such situation happened, appropriate information or evidence should be disclosed. Constraints on Financial Reporting
Application of the Constraints on Financial ReportingMateriality is said to be one of the pervasive constraint on financial reporting because it attribute to all the qualitative characteristics. For example, materiality need to be measured when determine the sufficiency of relevant information and sufficiency of complete, neutral, and free from error to faithfully represent in financial reporting. Application of the cost constraint in financial reporting included evaluate whether the benefits of reporting information will be able to impose the costs. It is necessary to reflect on whether one or some qualitative characteristics one or some of the enhancing qualitative characteristics will be given up to reduce the cost. Related Posts:
Which qualitative characteristic of accounting is reflected when unnecessary and irrelevant information is not included in financial statements?Answer. If the accounting information is not clearly presented, then the qualitative characteristics like, comparability, reliability and understandability, are violated.
Which qualitative feature of accounting is reflected in the following cases a free from personal bias?Answer: The qualitative characteristic of accounting that requires the use of a common unit and format of reporting is comparability. 'Accounting information should be verifiable and free from personal Bias'.
Which qualitative characteristics of accounting information is reflected when accounting information is free from errors?Understandibility qualitative characteristics of accounting information is reflected when accounting information is clearly presented. As understandibility means that the information provided through the financial statements be presented in a manner that the users are able to understand it in the manner it should be.
What are the qualitative features of accounting information?There are six qualitative characteristics of accounting information.. Verifiability.. Timeliness.. Understandability.. Comparability.. |