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Abm M2

The document outlines the qualitative characteristics of financial information, which are categorized into fundamental and enhancing traits that ensure the usefulness of financial statements. Fundamental characteristics include relevance and faithful representation, while enhancing characteristics encompass verifiability, comparability, understandability, and timeliness. Additionally, it details Generally Accepted Accounting Principles (GAAP) that govern accounting practices, emphasizing the importance of these principles in providing valuable financial information.

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6 views3 pages

Abm M2

The document outlines the qualitative characteristics of financial information, which are categorized into fundamental and enhancing traits that ensure the usefulness of financial statements. Fundamental characteristics include relevance and faithful representation, while enhancing characteristics encompass verifiability, comparability, understandability, and timeliness. Additionally, it details Generally Accepted Accounting Principles (GAAP) that govern accounting practices, emphasizing the importance of these principles in providing valuable financial information.

Uploaded by

pkm6y7ybmj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Qualitative Characteristics of Financial Information

● What should be reported in the financial statements


● Two Major Categories: Fundamental and Enhancing

Fundamental Characteristics makes the financial info useful


Relevant
● Important for the users to know
● Presence or absence can impact economic decision
● Materiality in terms of:
○ Predictive value - used in making predictions
○ Confirmatory value - confirming past predictions

Faithful Representation (or Reliability)


● Provides a true, correct and complete depiction of what it purports to
represent
○ Completeness - All information for users to understand the
phenomenon being depicted is provided.
○ Neutrality - information is presented without bias.
○ Free from error - no errors in the description and in the process
by which information is selected and applied.
Enhancing Characteristics (VCUT) Verifiability
● Different users could reach consensus as to what the information
purports to represent.
Comparability
● Information helps users in identifying similarities and differences
between different sets of information.
Understandability
● Users are expected to have:
○ reasonable knowledge of business activities;
○ willingness to analyze the information diligently.
Timeliness
● Information is available to users in time to be able to influence their
decisions.

Generally Accepted Accounting Principles


Unbreakable Rules that Govern Accounting | Guiding light | Unbreakable rule
| Widely recognized by all
● Qualitative Characteristics ensures that financial information
would be valuable to users
○ Fundamental -must have
○ Enhancing -good to have but useless if fundamental
quality control is inexistent

What are the Generally Accepted Accounting Principles (GAAP)?


1. Separate Entity - The business is viewed as a separate entity, distinct
from its owner(s).
○ Only the transactions of the business are recorded in the books
of accounts, personal transactions of the business owner(s) are
not recorded.
2. Historical Cost - Assets initially recorded at their acquisition cost.
3. Going Concern - The business is assumed to continue to exist
for an indefinite period of time.
4. Consistency - Like transactions are accounted for in like manner from
period to period.
5. Materiality - An item is considered material if its misstatement could
influence economic decisions.
○ A matter of professional judgement and is based on the size and
nature of an item being judged.
6. Cost-benefit - The costs of processing and communicating information
should not exceed the benefits to be derived from the information’s use.
7. Conservatism/Prudence - If there is a choice between a potentially
unfavorable outcome and a potentially favorable outcome, the unfavorable
one is chosen.
○ This is necessary so that assets or income are not overstated and
liabilities or expenses are not understated.
8. Stable Monetary Unit - Assets, liabilities, equity, income and expenses are
stated in terms of a common unit of measure, which is the peso in the
Philippines.
○ The purchasing power of the peso is regarded as stable. Therefore,
changes in the purchasing power of the peso due to inflation are
ignored.
9. Accrual Concept - Income is recorded in the period when it is earned
rather than when it is collected, while expense is recorded in the period
when it is incurred rather than when it is paid.
10. Matching - Some costs are initially recognized as assets and charged
as expenses only when the related revenue is recognized.
11. Full Disclosure/Adequate Disclosure - Information communicated to users
reflect a balance between detail and conciseness, keeping in mind the cost
benefit principle.
12. Time Period/Periodicity - The life of the business is divided into a series of
reporting periods.

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