REGUNAYAN, MARCO PAUL C.

CBET – 01 – 502E INTERMEDIATE ACCOUNTING 3

1. Who are the users of accounting information and how do they benefit from this
information?

The objectives of accounting information directly correlate to the decision-making

requirements of the users. Generally, the users of accounting information can be classified as
internal users and external users.

Internal users:

 Owners – they are the one who puts in capital in a business endeavor. Owners
must read the financial reports and need to assess how well their business is
performing. They seek answers to whether it is profitable or it is accumulating
sufficient wealth to remain stable.
 Managers – they are the one who is responsible for running the business.
Financial reports make it possible to evaluate performance of the business. They
assess whether the plans being implemented are beneficial to the business and it is
operating profitably.
 Employees – they will assess the ability of the business to grant these demands
through the financial reports: higher wages, benefits, good working conditions
and job security.

External users:

 Investors – they need to know how well their investment is performing. Investors
use accounting information to determine whether an investment is a good fit for
their portfolio and whether they should hold, increase or decrease their
investment.
 Lenders or Creditors – they assesses the paying ability of the business-borrower
by reading the financial reports.
 Suppliers – they need accounting information to assess the credit-worthiness of its
customers before offering goods and services on credit.
 Customers – they assesses the company’s ability to continuously supply the goods
they need at the right price and right quantity.
 Government – through its tax agent, they investigate tax returns and assess
truthfulness of the company’s disclosure of accounting information as well as the
tax liability paid by the business.
 2. What is the primary objective of financial statements?

Financial statements provide financial information about an entity’s assets, liabilities,

equity, income and expenses useful to users of financial statements in assessing future cash flows
to reporting entity and management stewardship of entity’s economic resources.

3. Name the two fundamental qualitative characteristics of useful financial

information. Explain each.

The two fundamental qualitative characteristics are relevance and faithful representation.
Information must be both relevant and faithfully represented if it is to be useful.

 Relevance – accounting information in the financial statements must be relevant to the

users. Information is relevant if it meets the needs of the users in decision making.
 Faithful Representation – accounting information presented in the financial statements
should faithfully represent the transaction and events that occur during a period. Requires
representing what it purports to represent.

4. Name the four fundamental qualitative characteristics of useful financial

information. Explain each.

Comparability, verifiability, timeliness and understandability are qualitative

characteristics that enhance the usefulness of information that both is relevant and provides a
faithful representation of what it purports to represent.

Comparability enables users to identify and understand similarities and dissimilarities

among items.

The financial information is verifiable in the sense that it is supported by evidence so that
users would arrive at the same economic decision or conclusion.

Timeliness means that financial information must be available or communicated early

enough when a decision is to be made.

An essential quality of the information provided in financial statements is that is it readily

understandable by users, clearly and concisely makes it understandable.

5. Define comparability. How does consistency affect the quality of comparability?

Comparability helps one identify changes taking place in the entity between two or more
periods so users will be able to determine the change or trend of its performance or position. The
rule of comparability is complemented by the rule of Consistency. Consistency requires
uniformity of accounting treatment from one period to another period or else comparison is not
valid. It will lead to confusion on the part of the users of accounting information when there is no
consistency in reporting the financial statements of one’s business. For example, an entity cannot
use average method of inventory valuation in one year, the FIFO method in the next year, again
the average method in succeeding year and so on.

6. What are the elements of relevance?

Relevance prescribes the quality of information that will make a difference and influence
a statement user to make a meaningful decision.

The information must give the past performance of the business (feedback value) which
is useful in projecting what might take place in the future (predictive value).

The relevance of financial information is also affected by materiality. Materiality will

depend on whether an item (by its nature or size) will influence user’s decision or not.

Aside from materiality another element in reporting relevant information is timeliness.

Reports must be given promptly or within the period it is needed to form judgment else it loses
its usefulness.

An element such as Materiality and Timeliness permits leeway in the application of the
principles as long as it does not reduce the relevance or usefulness of the financial information.

7. What are the elements of faithful representation?

The financial information in the financial reports should represent what it purports to
represent. Meaning, it should show what really are present and what really happened, as the case
may be.
There are three elements of faithful representation:
 Completeness – a complete depiction includes all information necessary for a user
to understand the phenomenon being depicted, including all necessary
descriptions and explanations.
 Neutrality – a neutral depiction is without bias in the selection or presentation of
financial information.
 Free from error – there are no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information has been
selected and applied with no errors in the process.
 8. Enumerate and define the elements of financial position.
The elements directly related to the measurement of financial position are:
 Assets – are future economic benefits controlled by the entity as a result of past
transactions or other past events
 Liabilities – are the future sacrifices of economic benefits that the entity is
presently obliged to make to other entities as a result of past transactions or other
past events.
 Equity - is the residual interest in the assets of the entity after deduction of its
liabilities.

9. Enumerate and define the elements of performance.

The elements directly related to the measurement of financial performance are:
 Income or Revenue – represents inflow of cash or other assets coming from a
client or customer for service rendered or for merchandise sold.
 Expense – is the consumption of asset or using up of service to generate revenue.

10. Identify the criteria that an item must meet to qualify for recognition as assets
and liabilities.
An asset should be recognized in the statement of financial position when and only when:
 It is probable that the future economic benefits embodied in the asset will
eventuate.
 The asset possesses a cost or other value that can be measured reliably.
A liability should be recognized in the statement of financial position when and only
when:
 It is probable that the future sacrifice of economic benefits will be required.
 The amount of the liability can be measured reliably.