Question

LO 1 Qualitative Characteristics and Accounting Conventions E2A. CONCEPT Each of the statements that follow violates one or more accounting con- cepts. State which of these selected qualitative characteristics and accounting conventions- relevance, faithful representation, comparability, verifiability, timeliness, understandability, cost constraint, consistency, materiality, conservatism, or full disclosure-is (are) violated. 1. A company changes its method of accounting for depreciation. 2. The asset account for a pickup truck still used in the business is written down to what the truck could be sold for, even though the carrying value under conventional depreciation methods is higher. 3. A series of reports that are time-consuming and expensive to prepare are presented to the owner cach month, even though they are never used. 4. The company in 1 does not indicate in the financial statements that the method of depreciation was changed, nor does it specify the effect of the change on net income. 5. A company's new office building, which is built next to the company's existing factory, is debited to the factory account because it represents a fairly small dollar amount in relation to the factory. 6. Information is presented in a way that is not useful to users. 7. A transaction is recorded that does not represent the substance of the economic event. 8. Information is presented in a way that is confusing to users. 9. Similar transactions are recorded using different accounting principles. 10. Information is reported long after the economic events they represent. 11. Various experts come up with widely different estimates of an amount.

Answer 1

1. Consistency convention is violated because once a method is selected for charging depreciation it should not be changed until for better presentation of financial statement and compliance with the law.

2. Faithful representation is violated as under this convention transaction and events should be recorded in the way they are correctly expected to be reported in financial statements. The pickup truck is recorded at a lower value which leads to understating assets.

3. Cost constraint convention is violated as it states that the cost of providing financial statements should not outweigh the benefit of that information to the users of that information. And a series of reports are expensive and time-consuming even though they are never used by the owner.

4. Full Disclosure is violated as it states that all relevant information should be disclosed in accounting and change in method will impact the profitability of the company.

5. Materiality convention is violated. It states that items of important matters are to be disclosed and theoretically stated and explained.

6. Relevance convention is violated. It states that information that can impact the decision making of users should be recorded. And here information is presented in such a way that is not useful to users.

7. Materiality concept as it states that items, transactions or an event that significantly affects a user’s understanding should be recorded. And here the information does not represent the substance of the economic event. So, it should not be separately recorded.

8. Understandability is violated. This concept states that financial statements or information must be recorded or presented in a manner so that users can easily understand it.

9. Comparability is violated here. It states that accounting information must be recorded in a way that allows financial statements of different organizations to be compared with each other. And if similar transactions are recorded using different accounting principles then it cannot be used for comparing.

10. Timeliness convention is violated. It refers to the need for accounting information to be presented to the users in time so that they can make a decision on time.

11. Verifiability is violated. Financial statements or estimation of amounts must be prepared or calculated using same assumptions so that it can be verified. It cannot be achieved without knowing the assumptions used by a business for preparing their financial statements.