Question

7. Transactions that can have an effect on the decisions of shareholders are referred to by accountants as: a) Relevant b) Completed c) Unqualified d) Accurate 8. The idea that financial information must represent events and transactions as they actually took place, is: a) Materiality b) Relevance c) Transactional analysis d) Representational faithfulness

i wanna know the answers for these questions and the explanations as well (ex.why the answer is 'a' and why not others(b is about ..., c is bout...))

Thank you so much!

Answer 1

Answer 7 :-Transaction that can have an impact on the decision of the shareholder are referred to as by the accountant as Relevant. (Option (a))

Relevance is an important accounting principle that states in order for financial information to be useful to external users, it must be relevant

Relevant information is useful, understandable, timely, and needed for decision making.

Information should be relevant to the decision making needs of the user. Information is relevant if it helps users of the financial statements in predicting future trends of the business

Example:-

A company discloses an increase in EPS from $5 to $6 since last reporting period.

This information is relevant to investor as it may assist them in confirming their past prediction regarding the profitability of the company and will also help them in forecasting future trend in earnings of the company.

Answer 8:- The idea that financial information must represent events and transaction as they actually took place is Representational Faithfulness. (Option (d))

Information presented in the financial statements should faithfully represent the transaction and events that occur during a period.

Faithfull representation requires that transactions and events should be accounted for in a manner that represent their true economic substance rather than the mere legal form. This concept is known as Substance over Form.

Substance over form requires that if substance of transaction differs from its legal form than such transaction should be accounted for in accordance with its substance and economic reality.

The rationale behind this is that financial information contained in the financial statements should represent the business essence of transactions and events not merely their legal aspects in order to present a true and fair view.

Example

A machine is leased to company A for the entire duration of its useful life. Although Company A is not the legal owner of the machine, it may be recognized as an asset in its balance sheet since the Company has control over the economic benefits that would be derived from the use of the asset This is an application of the accountancy concept of substance over legal form, where economic substance of a transaction takes precedence over its legal aspects.