Chapter 3: CONCEPTUAL FRAMEWORK Qualitative Characteristics

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

Qualitative characteristics are the qualities or attributes that make financial accounting
information useful to the users.
2. What are fundamental qualitative characteristics? The fundamental qualitative characteristics
are relating to the content or substance of financial information, and it is to be useful.
3. What are the two fundamental qualitative characteristics? The two fundamental qualitative
characteristics are relevance and faithful representation.
4. Explain the most efficient and effective process applying the fundamental qualitative
characteristics. The most efficient and effective process applying the fundamental qualitative
characteristics would usually be:
1. First, identify an economic phenomenon that has the potential to be useful.
2. Second, identify the type of information about the phenomenon that would be most
relevant and can be faithfully represented.
3. Third, determine whether the information is available.
5. Explain relevance. Relevance is the capacity of the information to influence a decision. It must
be capable of making a difference in the decisions made by users.
6. What are the two ingredients of relevance? The two ingredients of relevance are the predictive
value and confirmatory value.
7. Explain predictive value. Predictive value is if it can be used as an input to processes employed
by users to predict future outcome, it can help users increase the likelihood of correctly or
accurately predicting or forecasting outcome events.
8. Explain confirmatory value. Confirmatory value is if it provides feedback about previous
evaluation, it can help shareholders confirm or revise their expectation about an entity’s
ability generate earnings.
9. When is an item material? An item material is knowledge of it could reasonably affect or
influence the economic decision of the primary users of the financial statements.
10. Explain the new definition of materiality? The new definition of materiality is information is
material of omitting, misstating or obscuring it could reasonably be expected to influence the
economic decisions that primary users of general purpose financial statements make on the
basis of those statements which provide financial information about a specific reporting
entity. It is material if the omission, misstatement and obscuring of the information could
reasonably affect the economic decision of primary users. A. Could reasonably be expected to
influence, B. Obscuring information, C. primary users
11. What are the factors that may be considered in determining materiality? The factors that may
be considered in determining materiality depends on relative size rather absolute size.
12. Explain the fundamental qualitative characteristic of faithful representation. Faithful
representation means that financial reports represent economic phenomena or transactions
in words and numbers. It means that the actual effects of the transactions shall be properly
accounted for and reported in the financial statements.
13. What are the three ingredients of faithful representation? The three fundamental qualitative
characteristics of faithful representation are the following:
 Completeness – is the result of the adequate disclosure standard or the principle of
full disclosure
  Neutrality – it is a depiction that is without bias in the preparation or presentation of
financial information. It is not slanted, weighted, emphasized, de-emphasized or
otherwise manipulated to increase the probability that financial information will be
received favorably or unfavorably by users.
 Free form error - it means there are no errors or omissions in the description of the
phenomenon or transaction.

14. Explain completeness of financial information. The completeness of financial information

includes all information necessary for a sure to understand the phenomenon being depicted
including all necessary descriptions and explanation. It requires the relevant information
should be presented in a way that facilities understanding and avoids erroneous implication.
15. What is the standard of adequate disclosure? The standard of adequate disclosure means that
all significant and relevant information leading to the preparation of financial statements shall
be clearly reported. The accountant shall disclose a material fact known to him which is not
disclosed in the financial statements but disclosure of which is necessary in order that the
financial statements would not be misleading.
16. Explain notes to financial statements in relation to completeness of financial information. That
to be complete, the financial statements shall be accompanied by “notes to financial
statements”. Its purpose is to provide the necessary disclosures
17. Explain neutrality of financial information. The neutrality of financial information is a neutral
depiction that is without bias in the preparation or presentation of financial information. To
be neutral the information contained in the financial statements must be free from bias. To be
neutral is to be fair.
18. What is prudence? Prudence is the exercise of care and caution when dealing with the
uncertainties in the measurement process such that assets or income are not overstated and
liabilities or expenses are not understated.
19. Explain conservatism. Conservatism means that when alternatives exist, the alternative which
has the least effect on equity should be chosen. It means “in case of doubt, record any loss
and do not record any gain”.
20. Explain free from error financial information. Free from error information means there are no
errors or omissions in the description of the phenomenon or transaction.
21. Explain the effect of measurement uncertainty to usefulness of financial information. The effect
of measurement uncertainty to usefulness of financial information arises when monetary
amounts in financial reports cannot be observed directly and must instead be estimated. As
long as the estimate is clearly and accurately described and explained, even a high level of
measurement uncertainty does not affect the usefulness of the financial information.
22. Explain the concept of substance over form. Substance over form is if information is to
represent faithfully the transactions and other events it purports to represent, it is necessary
that the transactions and events are usually emphasized when economic substance differs
from legal form. Faithful representation inherently represents the substance of an economic
phenomenon or transaction rather than merely representing the legal form. Representing a
legal form that differs from the economic substance of the underlying economic phenomenon
transaction could not result in a faithful representation.
23. What are the enhancing qualitative characteristics? The enhancing qualitative characteristics
are intended to increase the usefulness of the financial information that is relevant and
faithfully represented. Those characteristics are comparability, understandability, verifiability,
and timeliness.
24. Enumerate the four enhancing qualitative characteristics. The four enhancing qualitative
characteristics are Verifiability, Timeliness, Understandability, and Comparability.
25. Explain comparability. Comparability means the ability to bring together for the purpose of
noting points of likeness and difference.
26. Explain comparability within a single entity. Comparability within a single entity is the quality
of information that allows comparisons within a single entity through time or from one
accounting period to the next.
27. Explain comparability between and across entities. Comparability between across entities is the
quality of information that allows comparisons between two or more entities engaged in the
same industry.
28. What is consistency? Consistency refers to the use of the same method for the same item,
either from period to period within an entity or in a single period across entities.
29. Distinguish consistency form comparability. Consistency is the uniform application of
accounting method between and across entities in the same industry. On the other hand,
comparability is the uniform application of accounting method between and across entities in
the same industry.
30. Explain verifiability. Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation. It should be supported by evidence.
31. Distinguish direct verification and indirect verification. Direct verification means verifying an
amount or other representation through direct observation, for example, by counting cash.
Indirect verification means checking the inputs to a model, formula or other technique and
recalculating the inputs using the same methodology.
32. Explain timeliness. Timeliness means that financial information must be available or
communicated early enough when a decision is to be made.
33. Explain cost constraint on useful financial information. Cost constraint on useful financial
information is a consideration of the cost incurred in generating financial should exceed the
cost incurred in obtaining the information.
34. What is the rule on cost constraint?The benefit derived form the information should exceed
the cost incurred in obtaining form having the information.