MODULE 4

Activity 1

Answer in a clean sheet of paper/s what is required. Attached the activity.

1. What is the meaning of qualitative characteristics of Financial information?

Within the Financial Reporting Conceptual Framework, qualitative attributes

are classified into fundamental qualitative features and enhancement of qualitative

characteristics. This will serve as a guideline to provide accurate financial information to a wide

user. 

2. What are fundamental qualitative characteristics?

These attributes were described in the fundamental qualitative characteristics are

relevance, materiality, faithful representation, completeness, neutrality, comparability,

comprehensibility, verification and timeliness.

3. What are the two fundamental qualitative characteristics?

The two fundamental qualitative characteristics are relevance and faithful representation. It
allows users of financial statements to predict future market trends (Predictive Value) or to confirm or
correct any previous forecasts they have made (Confirmatory Value) and the no-biased representation
that help to foresee the condition of a firm.

4. Explain the most efficient and effective process of applying the fundamental qualitative

characteristics.

The most efficient and effective process for applying the fundamental qualitative characteristics

would be to easily comprehend the financial information since it is presented in a relevant and faithful

way. However, it has corresponding ingredients to be considered and followed to become useful in the

decision making of the financial users.

Relevance is the power of knowledge to determine a judgment. To be relevant, a business

experiencing a good quarter and delivering these enhanced results to creditors is important to the

decision-making process of the creditors to extend or increase the company's available credit.

Therefore, it will also provide documentation for the processes of financial decision-making.

6. What are the two ingredients of relevance?

The two ingredients of relevance are Confirmatory value and Predictive Value.

7. Explain predictive value.

Predictive value is concerned with the quality of information that provides predictive power

regarding possible future events.

8. Explain confirmatory value.

Confirmatory value is concerned with the quality of information that provides information about

past events

9. Explain materiality.

Accounting materiality refers to the importance of an abundance or understatement of financial

details. It can also be addressed as a "subquality" of relevance, depending on the existence or

significance of the objects to which the data relates, or both.

10. When is an item material?

An item is material if the knowledge of it will impact the judgment of the knowledgeable users of the

financial statements or influence it.

11. What are the factors that may be considered in determining materiality?

The factors of materiality that need to be considered when applying it are the relative size and

function of an object are considered in the exercise of judgment in assessing materiality. The nature of

the object can be inherently material because it influences economic decisions by its very nature.

12. Explain the fundamental qualitative characteristic of faithful representation.

The fundamental qualitative characteristic of faithful representation should make the financial

information complete, neutral, and free from error. Therefore, the financial statements will properly

reflect the performance of a business.

13. What are the three ingredients of faithful representation?

A depiction should have three characteristics to be a completely faithful portrayal, namely,

Completeness, Neutrality, and Free from error.

14. Explain completeness of financial information.

Completeness requires the presentation of relevant information in a manner that encourages

comprehension and prevents inaccurate involvement. For example, all transactions included in the

statement took place during the accounting period covered by the statement, and that all transactions

that took place during the reporting period are included in the statement.

15. What is the standard of adequate disclosure?

The adequate disclosure standard ensures that all essential and significant details leading to the

preparation of financial statements must be explicitly published. Therefore in the accounting field, it is
the best representation by disclosure of any financial facts that are sufficiently important to affect the

judgment of informed users.

16. Explain notes to financial statements in relation to completeness of financial

information.

The completeness of financial information is to make the requisite disclosures mandated by the

Philippine Financial Reporting Standards. If so, the financial statements must be followed by "notes to

financial statements" to be completed.

17. Explain neutrality of financial information.

In the processing or presentation of financial details, a neutral representation is without

prejudice. The financial information should exclude the other party’s opinions, thus it provides fair

results for the operation of the corporation.

18. Explain free from error financial information.

Free from error shall not contain any mistakes or omissions in the transaction. Despite using an

estimation, it should be clear and accurate. Therefore, financial information will be able to provide an

appropriate view of the organization.

Answer in a clean sheet of paper/s what is required. Attached the activity.

1. Explain the concept of substance over form.

Where the economic substance varies from the legal form, the economic substance of

transactions and events is generally acknowledged. Since it would be redundant, it is not considered a

distinct component of faithful representation for the substance over form. Therefore, the recordation of

a transaction should not hide its true intent, which would mislead the readers of a company's financial

statements.

2. What is conservatism?

Conservatism is not a license to understate net profits and net assets purposely. It is a concept

that involves the planning of company accounts with precaution and high standards of verification.

3. What are some expressions of conservatism?

These are the expressions of conservatism given in the module:

“Anticipate no profit and provide for probable and measurable loss."

“In the matter of income recognition, the accountant takes the position that no matter how sure the
businessman might be in capturing the bird in the bush, he, the accountant, must see it in the hand.

“Don't count your chicks until the eggs hatch".

4. What is prudence?
 Prudence is an accounting concept that allows an accountant to report liabilities and

expenditures as soon as they arise, but profits only when assured or realized. It helps the financial

statements to show a more realistic picture of the elements in accounting namely, Assets, Liabilities,

Equity, Revenue and Expenses. It can also be the same in conservatism concepts.

5. What are enhancing qualitative characteristics?

The enhancing qualitative characteristics are intended to improve the reliability of appropriate

and faithfully depicted financial data. It has respective characteristics such as comparability,

understandability, consistency, and verifiability. The purpose of this is to improve the decision

usefulness of financial reports when the fundamental qualitative characteristics have been established

6. Enumerate the four enhancing qualitative characteristics.

The four enhancing qualitative characteristics are the following:

 Comparability
 Cosistency
 Understandability
 Verifiability

7. Explain comparability.

Comparability is the improving qualitative function that helps users to recognize and

comprehend similarities and dissimilarities between objects. This makes it easier for investors to

understand financial statement information in light of comparable peer data.

8. Explain comparability within a single entity.

Comparability within an entity is also known as horizontal comparability or

intracomparability. This means that businesses around the world file annual reports in

compliance with the same accounting standards and principles, allowing consumers

(shareholders, debt holders, potential investors, analysts, etc to compare the performance of

various companies around the world.

The consistency of knowledge is the comparability between and across organizations. This

makes comparisons between two or more organizations participating in the same field. Comparability

across entities is also known as intercomparability or dimensional comparability.

10. What is consistency?

Consistency refers to the use of the same technique, either for the same thing, or from time to

period, within an entity, or through an entity in a single period. This avoids confusion or chaos and if the

accounting policy is changed for some good reason, the corporation must report the purpose of the

adjustment, the reasons for the change, and its impact on the items in the financial statements.

11. Distinguish consistency from comparability.

Comparability refers to the mechanism by which two or more firms are measured based on their

position. Consistency, on the other hand, means the equality of a company's practices and policies,

which helps the consumer to compare the financial statements of a given accounting period. Therefore,

comparability is the goal, and consistency helps to achieve that goal.

12. Explain understandability.

Understandability required the financial information to be coherent or intelligible financial

details wherein the accountants must avoid using jargon words to present the accounting data. It is very

significant since the provided information determines the comprehension of the users in making

decisions.

13. Explain verifiability.

Verifiable financial information gives outcomes that can be substantially duplicated using the

same calculation approach by measurers. It won't achieve without knowing the assumptions used by a
business in the construction of its financial statements. Therefore, it is used to determine the

assumptions used by the other party are reasonable or not.

14. Distinguish direct verification and indirect verification.

The two type of verification

Direct verification - It involves examining, by direct observation, a number or other representation,

Indirect verification - It involves checking the inputs to a model, formula, or other technique and using
the same approach to recalculate the outcomes.

15. Explain timeliness.

Timeliness ensures that when a decision is to be taken, financial details must be available or

shared early enough. For instance, if a business publishes its financial statements a year after its

accounting period, it will be difficult for consumers of financial statements to assess how well the

company is doing at present.

16. Explain cost constraint on useful financial information.

Cost constraint is the consideration of the cost of generating financial data against the value to

be derived by getting the data. It can use different ways to report qualitative information and could

narrow information to avoid costs.

17. What is the rule on cost constraint?

The rules on cost constraint for the evaluation of the cost constraint is substantially a

judgmental process. It is difficult to quantify and becomes a matter of professional judgment to

determine whether the reporting costs outweigh or fall short of the benefit.
REFLECTION

What did I learn?

These lessons tackled the qualitative characteristics of accounting information. I have learned that it is
classified into two types, namely, fundamental qualitative features and enhancement of qualitative
characteristics. In the fundamental, there is a standard in applying qualitative characteristics such as
relevance, materiality, faithful representation, neutrality, free from error, conservatism, and prudence.
On the other side, enhancing qualitative characteristics focuses on comparability, consistency,
understandability, and verifiability. All of them have corresponding roles to present the financial
information accurately and useful in making decisions for the betterment of the business operation. As a
student, I have enlightened and broadened my concepts about the proper qualitative characteristics in
accounting information guided by the conceptual framework. Thus, in the future, I will be able to
provide good accounting information in the business industry.