Question

Which of the following statements is not true? Relevant accounting information must be capable of making a difference in a user's decision. For accounting information to be relevant, it must have timeliness. Faithful representation means information must be neutral, complete, and free from error. Comparability means using different accounting principles from year to year within a company.

Answer 1

Answer: Option-(d): Comparability means using different accounting principles from year-to-year within a company. Reason: While preparing a firm's financial statements with the help of accounting records maintained by it, firm must frame and follow certain accounting principles in recording its business transactions in the accounting records. For example, method of depreciation for different types of assets, inventory valuation method, amortization of patents, amortization of discount or premium on bonds payable, etc. For evaluating firm's operating performance and financial condition year-by-year, analysts require company's financial statements containing prior period figures and current period figures for comparison purpose. If same accounting principles were used year-by-year, analysts can place reliance on results derived from comparing the prior period's figures with current period's figure. If different accounting principles were used year-by-year, those reported figures in different year's financial statements will lose its capablity of being taken up for comparison by evaluators because adjustment entries would have influenced quantum of reported figures significantly though there wouldn't be difference actually. However, comparability refers to comparing one company's financial information with another similar type of company's financial information for evaluation purpose. In order to make the comparability reliable and effective, different companies taken up for comparison must follow same accounting priciples. It means that 'Comparability' aims at comparing a firm's reported financial figures with another firm's reported financial figures but not within the firm. Therefore, option-(d) is is a false statement.