Financial Accounting Chapter 2: Qualitative Characteristics

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Questions and Answers

From which perspective are financial statements prepared?

From the perspective of the parent company

From the perspective of the reporting entity as a whole (correct)

From the perspective of the subsidiaries

From the perspective of the shareholders

What assumption is made about the entity's operational status in financial reporting?

The entity's financial statements will not be prepared

The entity will enter liquidation shortly

The entity will continue in operation for the foreseeable future (correct)

The entity will cease trading in the near future

What type of financial statements provide information about the parent's assets, liabilities, equity, income, and expenses, and not about those of its subsidiaries?

Unconsolidated financial statements (correct)

Segment financial statements

Combined financial statements

Consolidated financial statements

What term describes an entity that is required, or chooses, to prepare financial statements?

Reporting entity Signup and view all the answers

What type of financial statements provide information about the assets, liabilities, equity, income, and expenses of both the parent and its subsidiaries as a single reporting entity?

Consolidated financial statements Signup and view all the answers

What type of financial statements are prepared when the reporting entity comprises two or more entities that are not all linked by a parent-subsidiary relationship?

Combined financial statements Signup and view all the answers

What is the primary objective of financial statements in relation to the reporting entity's economic resources?

To provide financial information about the entity's assets, liabilities, equity, income and expenses that is useful to users of financial statements Signup and view all the answers

What is a necessary condition for financial information to be considered relevant?

It must be capable of making a difference in the decisions made by users Signup and view all the answers

What is the primary constraint on the information that can be provided by financial reporting?

The cost of providing financial information Signup and view all the answers

What is the primary purpose of financial statements in terms of the reporting entity's assets and liabilities?

To provide information about the entity's economic resources and claims against the entity Signup and view all the answers

What is one of the qualitative characteristics of useful financial information?

Relevance Signup and view all the answers

What is the purpose of financial statements in terms of assessing management's stewardship of the entity's economic resources?

To provide financial information about the entity's assets, liabilities, equity, income and expenses Signup and view all the answers

What is the primary purpose of general purpose financial reports in relation to the value of a reporting entity?

To provide information to help estimate the value of the reporting entity Signup and view all the answers

Which of the following is NOT a type of information that general purpose financial reports provide about an entity?

Industry and company outlooks Signup and view all the answers

What is the primary focus of general purpose financial reports in relation to an entity's management and governing board?

To evaluate the efficiency and effectiveness of the entity's management and governing board Signup and view all the answers

Who may find general purpose financial reports useful, besides existing and potential investors, lenders, and other creditors?

Management, regulators, and members of the public other than investors, lenders, and other creditors Signup and view all the answers

What is the primary purpose of general purpose financial reports in relation to an entity's economic resources and claims?

To provide information about economic resources and claims, and changes in those resources and claims Signup and view all the answers

What is the primary focus of general purpose financial reports in relation to an entity's financial performance?

To reflect both accrual accounting and past cash flows Signup and view all the answers

Study Notes

Perspective Adopted in Financial Statements

Financial statements provide information about transactions and other events from the perspective of the reporting entity as a whole, not from the perspective of any particular group of stakeholders.

Going Concern Assumption

The entity will continue in operation for the foreseeable future and has neither the intention nor the need to enter liquidation or to cease trading.
If such an intention or need exists, the financial statements may have to be prepared on a different basis.

Reporting Entity

A reporting entity is an entity that is required, or chooses, to prepare financial statements.
A reporting entity can be a single entity, a portion of an entity, or comprise more than one entity.
A reporting entity is not necessarily a legal entity.

Types of Financial Statements

Consolidated financial statements provide information about the assets, liabilities, equity, income, and expenses of both the parent and its subsidiaries as a single reporting entity.
Unconsolidated financial statements provide information about the parent's assets, liabilities, equity, income, and expenses, and not about those of its subsidiaries.
Combined financial statements are financial statements on which the reporting entity comprises two or more entities that are not all linked by a parent-subsidiary relationship.

Qualitative Characteristics of Useful Financial Information

Relevance: financial information that is capable of making a difference in the decisions made by users.
Faithful representation: financial information that accurately reflects economic phenomena.
Completeness: financial information that includes all necessary information for users to make informed decisions.
Neutrality: financial information that is free from bias.
Free from error: financial information that is accurate and reliable.
Materiality: financial information that could reasonably be expected to influence the decisions of users.
Verifiability: financial information that can be confirmed by evidence.
Comparability: financial information that allows users to identify similarities and differences between entities.
Understandability: financial information that is presented in a clear and concise manner.
Timeliness: financial information that is provided in a timely manner to allow users to make informed decisions.

Cost Constraint on Useful Financial Reporting

Cost is a pervasive constraint on the information that can be provided by financial reporting.

Financial Statements and the Reporting Entity

Financial statements provide information about the economic resources of the reporting entity, claims against the entity, and changes in those resources and claims.
The objective of financial statements is to provide financial information about the reporting entity's assets, liabilities, equity, income, and expenses that is useful to users of financial statements.

Objective of General Purpose Financial Reporting

General purpose financial reports do not provide information about general economic conditions and expectations, political events, and industry and company outlooks.
General purpose financial reports are not designed to show the value of a reporting entity; but they provide information to help existing and potential investors, lenders, and other creditors to estimate the value of the reporting entity.
Information needs of users include: economic resources and claims, changes in economic resources and claims, financial performance reflected by accrual accounting, financial performance reflected by past cash flows, and changes in economic resources and claims not resulting from financial performance.

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Description

Test your knowledge of the qualitative characteristics of useful financial information, including relevance, reliability, comparability, and faithful representation. Explore the fundamental and enhancing qualities of financial information in this chapter 2 quiz.