Question

The conceptual framework indicates the desired fundamental and enhancing qualitative characteristics of accounting information. Several constraints impede achieving these desired characteristics. Answer each of the following questions related to these characteristics and constraints.

Answer 1

1- MATERIALITY
Materiality simply defines what cost or asset has significant influence on the working of the company. For a large company, transactions in thousands will be considered as Materiality important. purchase of $120 printer would not be considered material for such company therefore it is treated as an expense rather than capitalizing as an asset. However the same would be reversed if it were a small company

2- NEUTRALITY
Neutrality simply means being Neutral between two parties or without any Bias. The notes about credibility of standard setting and the way board members are selected shows the concept of neutrality. Because there is no favoritism and every individual is given an equal chance of being selected based on how fit they are for the job and without the influence of special interest.

3- CONSISTENCY
Consistency simply means that accounting principles followed by company for preparation and presentation of financial statements and internal workings of one year will remain constant in the following years . Revenue recognition is also such accounting policy and when it is changed than CONSISTENCY policy is jeopardized.

4- TIMELINESS
As per the guidelines of government, a public company is required to file financial statements on quarterly and annual basis TIMELY with the SEC. Timeliness shows that many important information should reach the users within the required time based on which they can take important decisions about the company. Timeliness is about timely filing of reports as per norms of the government.

5- PREDICTIVE VALUE AND/OR CONFIRMATORY VALUE
Relevant information from business standpoint are those information which assists management in decision making processes. For information to be relevant, it should contain data both about past events that have already occured i.e. CONFIRMATORY as well as data about future which is based on assumptions and statistics i.e. PREDICTIVE

6- FAITHFUL REPRESENTATION
Financial statements are used by many stakeholders such as investors, creditors, bankers etc for the purpose of making relevant choices regarding business. It is trusted that whatever is represented or described in financial statements relates to those events and transactions that actually did occur in that year and there is FAITHFUL REPRESENTATION.

7- COMPARABILITY
When two companies are producing products of same nature but their method of accounting is different than there is difficulty in comparison. When two companies use same accounting methods in preparing financial statements than there is COMPARABILITY which assists investors in studying and understanding the workings of both companies so that the company which is more profitable can be chosen for investment purpose.

8- COST EFFECTIVENESS
It is the duty of every company to disclose necessary information as it is obligated to do so towards shareholders but disclosure of information also comes with a cost and this also needs to be carefully considered by the company when taking COST EFFECTIVENESS decisions. Every disclosure may not be relevant but relevant disclosure may turn out to be costly so making cost-benefit analysis is important before making such disclosures