What are the fundamental qualitative characteristics of financial statements? - Universal CPA Review (2024)

FAQs

What are the fundamental qualitative characteristics of financial statements? - Universal CPA Review? ›

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 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.

Relevance and faithful representation remain as the two fundamental qualitative characteristics. The four enhancing qualitative characteristics continue to be timeliness, understandability, verifiability and comparability.

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 ...

Fundamental (Primary) Qualitative Characteristics

Qualitative characteristics of accounting information that must be present for information to be useful in making decisions: Relevance. Representational faithfulness.

Comparability, verifiability, timeliness, and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.

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.

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.

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.

The primary decision-specific qualities that make accounting information useful are relevance. and reliabilitythe extent to which information is verifiable, representationally faithful, and neutral.. Both are critical. No matter how reliable, if information is not relevant to the decision at hand, it is useless.

What fundamental qualitative characteristics of accounting information are faithful representation and relevance? ›

Relevance means that information has predictive or confirmatory value. That is, it helps users to predict future outcomes, for example future profits, or it can confirm or refute previous predictions. Faithful representation means a depiction which is complete, neutral and free from error.

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 reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured, and displayed. Reliable information should be free from error and bias and faithfully represents what it is meant to represent.

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.

Answer and Explanation:

Materiality. Materiality is not one of the ingredients of the fundamental quality of faithful representation. This belongs to fundamental quality of relevance. The ingredients of the fundamental quality of faithful representation are completeness, free from error and neutrality.

The fundamental qualities of useful accounting information are relevance and faithful representation.

The reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured, and displayed. Reliable information should be free from error and bias and faithfully represents what it is meant to represent.

The term “qualitative characteristics of accounting information” refers to the attributes that make the information contained infinancial statements beneficial to the users. The qualitative characteristics of accounting information include relevance, reliability, understandability, and comparability.

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.